Recent CGS-CIMB Research Ideas Asia Pacific Daily - 14

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

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Asia Pacific Daily - 14 August 2019 Equity Research Reports…

▌IDEA OF THE DAY | Malaysia

Duopharma Biotech Bhd (ADD- Initiation, tp:RM1.56) - Bringing the A-game | P2 We initiate coverage on Duopharma Biotech (DBB) with an Add rating and TP of RM1.56, supported by a decent c. 4% dividend yield in FY19-21F. DBB is on the cusp of a period of continuous earnings

growth, in our view, on the back of its widening portfolio as its collaborations come into fruition. We forecast core net profit growth of 2.4%/11.3%/17.8% in FY19F/20F/21F, driven by the recent/imminent rollout of products in the high-value segment.

———————————————————————————————————————————————————————————————————————————————————————

▌REGIONAL / ASEAN / APAC Agribusiness (NEUTRAL) - Indonesia aiming for B50! | P3 ———————————————————————————————————————————————————————————————————————————————————————

▌Economics

SIN - Economic Update - 2Q19 GDP (revised) | P4 ———————————————————————————————————————————————————————————————————————————————————————

▌Australia

Aurizon (HOLD, tp:A$5.51▲) - Capital restructure the key talking point | P5 Challenger Financial Svcs (HOLD, tp:A$7.31▼) - Feels like the bottom, but not an easy FY20 | P6 Magellan Financial Group (HOLD, tp:A$57.80▲) - Going direct to the source | P7 ———————————————————————————————————————————————————————————————————————————————————————

▌China/Hong Kong CIFI Holdings (ADD, tp:HK$7.00▼) - Solid growth on stable margins | P8

Galaxy Entertainment (ADD, tp:HK$58.64▼) - Good luck in 2Q19 | P9 Hysan Development (HOLD, tp:HK$35.50▼) - A key victim of HK’s political unrest | P10

PAX Global Technology Ltd. (ADD, tp:HK$5.73▲) - Market share gains should continue … | P11 ———————————————————————————————————————————————————————————————————————————————————————

▌India

Bharat Forge (ADD, tp:Rs511.00▼) - A tough quarter is behind | P12 Bosch Ltd (REDUCE, tp:Rs12,114.00▼) - A prolonged business restructuring | P13 Insurance - Life (OVERWEIGHT) - Strong individual NBP growth | P14 ———————————————————————————————————————————————————————————————————————————————————————

▌South Korea S-Oil Corporation (ADD, tp:W110,000.00) - Key takeaways from Asia NDR | P15 ———————————————————————————————————————————————————————————————————————————————————————

▌Malaysia

Agribusiness (NEUTRAL) - What led to the recent run in CPO price? | P16 Autos (NEUTRAL) - MITI appoints anchor company for NNCP | P17 Telco - Mobile (NEUTRAL) - How are U doing? | P18 ———————————————————————————————————————————————————————————————————————————————————————

▌Singapore ComfortDelGro (ADD, tp:S$2.78▼) - 2Q19: Building a stable long-term ride | P19

Frasers Property Limited (ADD, tp:S$2.08) - Mixed performance | P20 Fu Yu Corp Ltd (HOLD, tp:S$0.22▲) - Positive 2Q | P21 HRnetGroup Limited (ADD, tp:S$1.01) - 2Q19: look forward to inorganic growth | P22

Wilmar International (ADD, tp:S$4.58▲) - Eyeing listing of China business in 2H? | P23 ———————————————————————————————————————————————————————————————————————————————————————

▌Thailand

Airports of Thailand (ADD, tp:THB82.00) - A soft quarter, reflecting weakened economy | P24 Central Plaza Hotel (HOLD, tp:THB34.50▼) - Dragged by weak hotel business | P25 KCE Electronics (REDUCE, tp:THB11.70▼) - Macro slowdown extinguishes rebound hope | P26

Minor International (ADD, tp:THB44.00) - Dragged by weak hotel margins | P27 PTT (HOLD▼, tp:THB47.50▼) - Gas EBITDA has peaked in 2Q19 | P28 Thanachart Capital (HOLD, tp:THB56.60▲) - The 10bn baht question | P29

Sources: CIMB. COMPANY REPORTS

Recent CGS-CIMB Research Ideas ——————————————————————————————————

HKG: Nissin Foods Co Ltd 09/08

Riding instant noodle premiumisation trend —————————————————————————————————————————————————————————————————————————————————

KRW: F&F 08/08 Beginning of a home-run streak —————————————————————————————————————————————————————————————————————————————————

THB: Economic Update 07/08 Aug MPC meeting ——————————————————————————————————————————————————————— ——————————————————————————

THB: Financial Services Overall 07/08

Big actions following surprise BOT rate cut —————————————————————————————————————————————————————————————————————————————————

HKG: AIA Group 01/08

Addressing concerns —————————————————————————————————————————————————————————————————————————————————

Regional Equity Research Contact ————————————————————————————————— Bertram LAI Head of Research T: (852) 2532 1111 E: [email protected]

———————————————————————————————————————————————————————————————————————————————————

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Company Note Pharmaceuticals │ Malaysia │ August 13, 2019 Shariah Compliant



INITIATION

Insert Insert

Duopharma Biotech Bhd

Bringing the A-game

■ We initiate coverage on Duopharma Biotech (DBB) with an Add rating and TP of RM1.56, supported by a decent c. 4% dividend yield in FY19-21F.

■ DBB is on the cusp of a period of continuous earnings growth, in our view, on the back of its widening portfolio as its collaborations come into fruition.

■ We forecast core net profit growth of 2.4%/11.3%/17.8% in FY19F/20F/21F, driven by the recent/imminent rollout of products in the high-value segment.

Leading pharmaceutical manufacturer in Malaysia DBB (formerly CCM Duopharma Biotech Berhad) was established in 1979 as a

pharmaceutical trading company. It ventured into manufacturing in 1986 and after

undergoing several corporate restructuring activities, evolved to become the largest

pharmaceutical company in Malaysia by sales volume, and second-largest in terms of

value, according to IQVIA. DBB is currently involved in the development, manufacturing

and marketing of medical drugs and has over 500 products in various therapeutic areas.

Benefits from strategic collaborations with foreign players In a bid to expand its presence in the niche and specialty products segment, the group

has leveraged the expertise of its foreign counterparts in India and South Korea, via

strategic collaborations and partnerships entered into since 2017. This has resulted in

exclusive marketing and distribution rights in ASEAN for products developed by its

counterparts, and diversification potential of its manufactured products. The group

remains focused on growing its prescription drugs and the over-the-counter (OTC)

segment. It has identified several key pillars of growth, including the oncology, renal,

diabetes care and hepatitis segments, as well as continued expansion of its OTC arm.

Strong earnings growth outlook from high-value products segment It has made solid progress with: i) the expected commissioning of Malaysia’s first Highly

Active Pharmaceutical Ingredients (HAPI) manufacturing plant in 3Q19F, ii) commercial

production of erythropoietin (EPO) in 3Q19F, iii) being the major supplier of insulin to the

Ministry of Health (MOH) with plans to launch a new long-acting biosimilar, and iv) the

imminent registration approval for a Hep C product. We are forecasting core net profit

growth of 2.4%/11.3%/17.8% in FY19F/20F/21F driven by new high-value product

launches (estimated to have limited contribution to earnings now as it is only distributing

it), better economies of scale, greater operating efficiencies, and export growth potential.

Initiate with an Add; forecast 3-year core EPS CAGR of 9% Our TP is based on 16x CY20F P/E, pegged to its 5-year historical mean. We think DBB

is well-positioned to capture the growing demand in the private/public healthcare sector,

supported by its inroads into the high-value segment and niche therapeutic areas. We

attribute the YTD run-up in its share price to investor confidence in DBB’s capabilities and

strong 1Q19 results. We initiate with an Add call as we believe there is upside potential,

while supported by dividend yield of c.4%. Re-rating catalysts: stronger healthcare

demand, further inroads into high-value segment. Risks: weak demand, regulatory risks.

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Malaysia

ADD

Consensus ratings*: Buy 2 Hold 0 Sell 0

Current price: RM1.34

Target price: RM1.56

Previous target: N/A

Up/downside: 16.5%

CGS-CIMB / Consensus: -3.1%

Reuters: DUOP.KL

Bloomberg: DBB MK

Market cap: US$217.2m

RM911.3m

Average daily turnover: US$0.18m

RM0.77m

Current shares o/s: 481.0m

Free float: 41.3% *Source: Bloomberg

Key changes in this note

N/A

Source: Bloomberg

Price performance 1M 3M 12M

Absolute (%) -2.2 2.3 12.6

Relative (%) 1.7 2.1 22.6

Major shareholders % held Permodalan Nasional Berhad (PNB) 46.7 Employee Provident Fund (EPF) 7.8 Amanah Saham Bhd (ASB) 4.2

Insert

Analyst(s)

Calyne TI

T (60) 3 2261 9082 E [email protected]

Financial Summary Dec-17A Dec-18A Dec-19F Dec-20F Dec-21F

Revenue (RMm) 465.7 498.7 546.4 598.8 661.8

Operating EBITDA (RMm) 83.0 99.9 114.3 129.4 149.7

Net Profit (RMm) 41.53 47.64 59.60 66.34 78.17

Normalised EPS (RM) 0.07 0.09 0.09 0.10 0.11

Normalised EPS Growth (40.7%) 21.9% (1.3%) 11.3% 17.8%

FD Normalised P/E (x) 13.14 15.04 15.02 13.74 11.66

DPS (RM) 0.085 0.055 0.044 0.049 0.057

Dividend Yield 6.34% 4.10% 3.27% 3.64% 4.29%

EV/EBITDA (x) 10.89 10.25 9.28 8.15 6.85

P/FCFE (x) NA 56.3 142.9 13.5 10.3

Net Gearing 6.5% 30.2% 27.3% 24.5% 18.1%

P/BV (x) 1.82 1.83 1.66 1.56 1.45

ROE 10.1% 12.1% 11.6% 11.7% 12.9%

% Change In Normalised EPS Estimates

Normalised EPS/consensus EPS (x) 1.04 1.12 1.11

79.0

96.1

113.3

130.4

0.800

1.000

1.200

1.400

Price Close Relative to FBMKLCI (RHS)

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Aug-18 Nov-18 Feb-19 May-19

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Sector Note Commodities │ ASEAN │ August 13, 2019



Agribusiness

Indonesia aiming for B50!

■ Indonesia plans to raise its biodiesel mandate to B30 by 2020 and B50 by 2021.

■ We estimate this could result in incremental demand for palm oil that exceeds supply, and this could spark the next CPO rally.

■ However, key hurdles include lack of installed capacities and infrastructure.

Indonesia eyes B30 by Jan 2020 and B50 by end-2020 Indonesian president Jokowi Widodo revealed during a cabinet meeting yesterday that he

wants an increase in the proportion of diesel blended with CPO from the current 20%

(B20) to 30% (B30) starting Jan 2020, and 50% by end-2020. He added that Indonesia

needs to anticipate any pressure on CPO demand by driving up domestic demand, in

order for the country to be in a good bargaining position, whether it be with the European

Union or other parties. The leap is also expected to lower the import of oil, which has

dragged down its current account position.

Trade issues with EU relating to palm oil On 24 Jul 2019, the European Commission proposed duties of between 8% and 18% on

imports of biodiesel from Indonesia to counter what it said were unfair subsidies from the

Indonesian government. The EU Commission launched an anti-subsidy investigation in

Dec following a complaint by the European Biodiesel Board. On 10 Jul 2019, the EU

Parliament passed the Delegated Act to restrict palm oil biodiesel usage.

Proposed import duty rates and timeline of implementation According to an EU executive, there is evidence that producers in Indonesia benefit from

subsidies in the form of export financing, tax breaks and provision of palm oil at artificially

low prices. The measures would be provisional, pending the conclusion of an EU

investigation, and be put in place by 6 Sep. Definitive duties would be set by 4 Jan 2020.

Positive for CPO price if B50 goes ahead We are positively surprised by Indonesia’s plan to raise its mandate to B50 as this is the

first time the government has announced such a target, the highest biodiesel mandate

pursued, based on our knowledge. Our rough estimate reveals that Indonesia’s plan to

raise its biodiesel mandate to B30 by Jan 2020 and B50 by Jan 2021 could boost the

country’s palm biodiesel usage to 9.6m and 16m kls (8.4mt and 13.9mt), respectively.

The higher demand for palm oil for new usage will be positive for CPO prices.

Potential rise in CPO demand for biodiesel could exceed supply We estimate the move will boost Indonesia’s palm oil consumption for domestic biodiesel

mandate by 3m and 5.6m tonnes, to 8.4m and 13.9m tonnes in 2020 and 2021,

respectively. The incremental palm oil usage represents 26-48% of Indonesia’s palm oil

consumption of 11.4m tonnes in 2018, and 4-8% of global palm oil consumption in 2018.

This is significant, and could spark the next CPO price rally, as over the past five years,

the average annual increase in CPO supply was only 3m tonnes.

Key hurdles: logistics, technical, infrastructure and CPO funding If implemented, this will be positive for biodiesel producers in Indonesia like Wilmar,

Golden Agri, Musim Mas and First Resources. The key hurdles to implementation of B50,

in our view, are availability of capacities (total biodiesel capacity in Indonesia is 11.8m

kls), CPO funding to support the programme, and acceptance of B50 biodiesel in cars.

Figure 1: Actual and potential biodiesel usage in Indonesia at various mandates

SOURCES: CGS-CIMB RESEARCH, MEDIA REPORTS

ASEAN

Neutral (no change)

Highlighted Companies

First Resources Ltd ADD, TP S$1.99, S$1.53 close

First Resources currently has 250k tonnes of installed biodiesel capacity. The group has received a 0.17m kls tender from the latest biodiesel tender for Jan - Dec 2019 by the government. This represents a 59.8% utilisation rate.

Golden Agri-Resources REDUCE, TP S$0.23, S$0.30 close

Golden Agri currently has 600k tonnes of installed biodiesel capacity. The group has received a 0.53m kls tender from the latest biodiesel tender for Jan – Dec 2019 by the government. This represents a 59.4% utilisation rate.

Wilmar International ADD, TP S$3.96, S$4.02 close

Wilmar is the largest producer of biodiesel in Indonesia with 3.74m kls (3.26m tonnes) capacity. The group has received a 2m kls tender from the latest biodiesel tender for Jan - Dec 2019 by the government. This represents a 53.5% utilisation rate.

Summary Valuation Metrics

Insert

Analyst(s)

Ivy NG Lee Fang, CFA


P/E (x) Dec-19F Dec-20F Dec-21F

First Resources Ltd 15.29 11.24 10.71

Golden Agri-Resources 37.71 29.95 27.07

Wilmar International 15.42 14.46 13.56

P/BV (x) Dec-19F Dec-20F Dec-21F

First Resources Ltd 1.73 1.56 1.42

Golden Agri-Resources 0.66 0.65 0.64

Wilmar International 1.11 1.06 1.01

Dividend Yield Dec-19F Dec-20F Dec-21F

First Resources Ltd 1.96% 2.67% 2.80%

Golden Agri-Resources 0.83% 1.05% 1.16%

Wilmar International 2.59% 2.77% 2.95%

Domestic mandate (year) m kls m tonnes Change in usage

B10 (2018A) 3.9 3.4

B20 (target 2019F) 6.2 5.4 2.0

B30 (target 2020F) 9.6 8.4 3.0

B50 (target 2021F?) 16.0 13.9 5.6

Note : 1 kl = 0.87 tonnes

3

Economics Note Singapore August 13, 2019



Economics Update

2Q19 GDP (revised)

■ Final GDP growth was unchanged at 0.1% yoy in 2Q19 while it fell 3.3% qoq SAAR (flash: -3.4% qoq SAAR).

■ Negative spillovers from external sector have started to show through the domestic economy as services sector and private consumption slowed.

■ MTI downgraded GDP growth projections to 0.0-1.0% in 2019, reflecting further downside risks to Singapore’s economy and the rest of the world.

■ We revise our 2019 GDP growth forecast to 0.5% and expect MAS to ease monetary settings in Oct.

Revised GDP growth remained at 0.1% yoy in 2Q19 There was no revision to the advance estimate by the Ministry of Trade and Industry

(MTI) as Singapore’s GDP expansion stayed at 0.1% yoy in 2Q19 (+1.1% yoy in 1Q19).

On a seasonally-adjusted annualised basis, 2Q19 GDP growth only shifted up slightly

from -3.4% qoq to -3.3% qoq (+3.8% qoq in 1Q19).

External conditions continued to drag manufacturing sector Manufacturing remains the key laggard to the economy as the sector’s activity slid by

3.1% yoy in 2Q19. Although better than flash estimate (-3.8% yoy), it was more severe

than the 1Q19 contraction of 0.3% yoy. The year-on-year performance was largely

dampened by electronics (-10% yoy), precision engineering (-3.4% yoy), chemicals (-

0.3% yoy) and transport engineering (-5% yoy). However, the seasonally-adjusted

annualised reading showed the sector contracting relatively more modestly after MTI’s

revision (-3.4% qoq vs. flash: -6.0% qoq).

Domestic economy has started to show weaknesses The moderation in domestic demand growth (+2.0% yoy in 2Q19 vs. +3.1% yoy in 1Q19)

was mainly pulled back by the slowdown in private consumption (+3.4% yoy vs. +5.4%

yoy in 1Q19) and private investments (-1.9% yoy vs. flat in 1Q19). Services’ sector

growth was revised downwards marginally (+1.1% yoy vs flash: +1.2% yoy), primarily

weighed by wholesale & retail trade (-3.2% yoy vs. -2.5% yoy in 1Q19) resulting from

declines in machinery, equipment & supplies as well as motor vehicle sales. Business

services’ growth also moderated to 0.5% yoy in 2Q19 (+1.7% yoy in 1Q19), as real estate

segment’s contraction persisted. External conditions remained challenging as net exports

fell sharply (-6.0% yoy in 2Q19 vs. -0.8% yoy in 1Q19), dragging headline growth by

1.6% pts in 2Q19 (-0.2% pts in 1Q19). On the other hand, construction sector’s

expansion held up in 2Q19 (+2.9% yoy vs. flash: +2.2% yoy), supported by public sector

(construction on progress payments: +12.9% yoy in 2Q19).

2019 GDP growth forecast revised to 0.5% According to the MTI, global economic growth has weakened further since its last survey

in May. Hence, the MTI lowered Singapore’s 2019 GDP growth projection to 0.0-1.0%

(+1.5-2.5% previously), expecting growth to register around the midpoint of the forecast

range. Besides that, MTI highlighted four major downside risks to the global economy: 1)

the US’s announcement of 10% tariff on US$300bn of Chinese imports, 2) weaker-than-

expected slowdown in China’s economy resulting from additional tariff imposition, 3) risk

of no-deal Brexit, and 4) uncertainties coming from Hong Kong protests, trade dispute

between South Korea and Japan, and geopolitical tensions in North Korea as well as the

Strait of Hormuz. We downgrade our 2019 GDP growth forecast to 0.5% (+1.8%

previously). We expect Monetary Authority of Singapore (MAS) to be more inclined

towards reducing the slope of S$NEER’s “modest and gradual appreciation” in Oct

meeting, while keeping the width and midpoint of the band unchanged.

Singapore

Revised GDP growth forecast

The steepest fall in manufacturing GDP

since 4Q15

Insert

Services sector breakdown

Economist(s)

Michelle CHIA


Sofea AZAHAR T (60) 3 2261 9096 E [email protected]

Actual

2Q19 CGS-CIMB Cons.*

Real GDP - %yoy 0.1 0.2 0.2

*Bloomberg median consensus

Forecast

-10

-5

0

5

10

15

20

25

1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19

%yoy

GDP: Manufacturing

4Q18 1Q19 2Q19

Services sector 1.5 1.2 1.1

Wholesale & retail trade -0.8 -2.5 -3.2

Transport & storage 0.5 0.7 2.2

Accommodation & Food 3.5 2.0 0.9

Information &

communications 5.0 5.2 4.1

Finance & insurance 3.7 3.2 5.2

Business services 2.6 1.7 0.5

Other services 0.3 2.6 2.1

%yoy

4

Transport│Australia│Equity research│August 12, 2019

IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

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Aurizon Holdings

Capital restructure the key talking point

While a material decline in earnings was expected, 2H19 EBIT beat our forecast.

The capital restructure and related buy-back is a game changer in the current market environment, partly offsetting the low growth outlook for the company.

Forecast changes drive material increases in EPS, mainly from the buyback. 12 month target price increases 79 cps to $5.51ps. HOLD retained.

Key result highlights 2H19 EBIT declined by 7% on pcp, with revenue down 6%. However, excluding the $20m QNI doubtful debt reversal the EBIT decline would have been 12%, still 4% better than forecast. EPS declined by 5%, or 10% excluding QNI reversal. 100% NPAT payout delivered a 2H19 dividend of 12.4 cps (70% franked). Operating CF and net debt was better than expected, albeit partly explained by the UT5 true-up being paid in 1Q20.

FY20 guidance Underlying EBIT guidance is $880-930m compared to FY19A $829m. We downgrade FY20F EBIT by 1% to $926m, with our forecast predicated on a rebound in Network earnings (regulatory impacts and cost-out) and a return to growth in Non-Network (growth in Coal contracted tonnage, but pricing pressures, iron ore volume decline, and $35m headwinds due to Rail Grinding sale and QNI recovery non-repeat). FY20 capex guidance of $520-550m includes $40-50m growth capex mainly for Qld coal wagons.

Vertical integration, capital restructure, and buy-back The strategic reviews resulted in AZJ: (1) choosing to remain vertically integrated; and (2) establishing independent gearing for Above Rail (Operations) in addition to Below Rail (Network). As well as the new on-market buyback of up to $300m, AZJ says the capital restructure will provide an additional $1.2bn of funding capacity while operating within BBB+/Baa1 credit ratings. The ~$350m of asset sale proceeds (Acacia Ridge, Rail Grinding) plus free CF post-dividends further adds to this capacity. AZJ says it will increase borrowings progressively over time - we assume a further $900m of buy-back across FY21-22F, while retaining $300m to fund potential Network capex obligations. Corporate activity with AZJ as a target, already constrained by the 15% shareholder cap, is further reduced by Operations and Network needing to remain members of the same corporate group for 3 years to avoid ~$300m Qld Govt duty related to the restructure.

Forecast changes FY20-22F EBITDA lifted 0-1% (upgrade Network, downgrade Non-Network), while EBIT declines 0-2% across the forecast period (higher D&A expense). As well as rebasing for the 2H19 result, we also factor in lower-for-longer economic factors (risk free rate, cost of new debt, and CPI expectations) reflecting current government bond market indications. EPS upgrades 2-9% across FY20-23, boosted by the buyback program. Our DCF valuation increases 79 cps to $5.51ps, driven mainly by the buyback program (increases leverage of the Above Rail business and thus decreases its cost of capital).

Investment view At current prices, we forecast a dividend yield of 4.8% for FY20F (with a high proportion of the dividend franked), and anticipate DPS growth of ~5% pa CAGR over FY21-22F. The buy-back should provide share price support. However, with the stock trading above our fundamental valuation, we think the benefit is priced.

SOURCE: MORGANS, COMPANY REPORTS

▎Australia

HOLD (no change) Current price: A$5.86

Target price: A$5.51

Previous target: A$4.73

Up/downside: -6.0%

Reuters: AZJ.AX

Bloomberg: AZJ AU

Market cap: US$7,944m

A$11,662m


A$61.18m

Current shares o/s 1,990m

Free float: 100.0%


Absolute (%) 5.4 17.9 33.2

Relative (%) 8.1 14.6 29.4

Nathan LEAD

T (61) 7 3334 4548

E [email protected]

Analyst(s) own shares in the following stock(s) mentioned in this report:

– N/A

Financial Summary Jun-18A Jun-19A Jun-20F Jun-21F Jun-22F

Revenue (A$m) 3,113 2,908 3,023 3,031 3,052

Operating EBITDA (A$m) 1,466 1,372 1,482 1,497 1,511

Net Profit (A$m) 483.0 476.4 598.7 552.4 553.4

Normalised EPS (A$) 0.28 0.24 0.27 0.30 0.31

Normalised EPS Growth (22.4%) (13.5%) 11.2% 11.9% 3.1%


DPS (A$) 0.27 0.24 0.28 0.30 0.31

Dividend Yield 4.62% 4.06% 4.79% 5.07% 5.29%

EV/EBITDA (x) 10.32 10.94 9.86 9.70 9.55

P/FCFE (x) 16.57 24.84 12.73 10.37 11.43

Net Gearing 73% 72% 73% 97% 111%

P/BV (x) 2.47 2.49 2.54 2.78 2.93

ROE 11.4% 10.2% 11.4% 13.2% 14.9%

% Change In Normalised EPS Estimates (1.94%) 5.48% 9.03%


89.0

97.0

105.0

113.0

121.0

129.0

3.70

4.20

4.70

5.20

5.70

6.20

Price Close Relative to S&P/ASX 200 (RHS)

Source: Bloomberg

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Challenger Financial Svcs

Feels like the bottom, but not an easy FY20

CGF's normalised NPBT (A$548m) was per the bottom end of management’s target range (A$545m-$565m).

Overall, we think this result gave increased confidence that CGF’s earnings profile has largely rebased. However, near term the stock faces headwinds, particularly deteriorating sales momentum in Australia on adviser disruption impacts.

We marginally lift F20F/FY21F NPAT by 1%/3%. Our PT is largely unchanged at A$7.31.

Maintain Hold rating; we see CGF’s ~12x FY20F PE multiple as fair value, given near-term earnings headwinds.

Summary CGF's normalised NPBT (A$548m) was per the bottom end of management’s target range (A$545m-$565m). FY19 Normalised NPAT (A$396m) was ~1% below consensus (Factset $400m) and down 3% on pcp. The group FY19 pre-tax ROE was 15.8% with the 2H19 performance (16.2%) up on 1H19 (15.6%). The 2H19 dividend of 18cps came in comfortably above consensus (15cps – MorgansE 16cps). FY20 guidance is unchanged from the investor day e.g. NPBT of A$500m to A$550m, a normalised ROE target of 14% + the RBA cash rate (~15%) and the FY20 DPS to be in-line with FY19.

The good 1) CGF’s life COE margin rose 10bps in 2H19 on 1H19 (3.67% vs 3.57%) benefitting from higher equity distributions and lower interest expense; 2) the 2H19 group pre-tax ROE (16.2%) also improved on 1H19 (15.6%) giving more comfort on CGF’s re-based ROE target going forward (15%); 3) Management noted that annuity front-book pricing is now close to that of its back-book pricing; 4) the 2H19 group cost-to-income ratio was stable on 1H19 (~32.5%); 5) CGF’s PCA capital ratio (1.53x) remains around the top-end of management's target range (1.3x-1.6x); and 6) FY19 funds management (FM) EBIT, ex performance fees, rose 23% on pcp.

The bad 1) 4Q19 fixed term annuity sales, ex Japan, declined 34% on pcp highlighting the impacts of recent disruption in adviser channels; 2) 2H19 annuity net book growth was just 1.6% in 2H19 versus 4.2% in 1H19 (mainly reflecting lower sales); 3) CGF’s annuity run off rate is expected to rise marginally in FY20 (25% vs 24% in FY19) on timing issues before declining again; 4) the PCA capital ratio (1.53x) didn’t improve as we expected in 2H19, with positive impacts from reduced property exposures offset by fixed income portfolio changes (less liquids/more non-investment grade debt); 5) 2H19 FM performance fees (A$1m) were well down on pcp (A$13m); and 6) Fidante Partners saw FY19 net outflows of A$3.6bn (predominantly due to one large super fund internalisation of A$3.9bn).

Changes to forecasts and investment view We marginally lift FY20F/FY21F NPAT by 1%/3%. Our PT is largely unchanged at A$7.31. While CGF’s long-term growth story remains intact, we think its ~12x FY20F PE multiple is fair value given near-term earnings pressures.

SOURCE: MORGANS ESTIMATES

▎Australia




Up/downside: 9.8%

Reuters: CGF.AX

Bloomberg: CGF AU


A$4,073m


A$23.29m

Current shares o/s 552.5m

Free float: 100.0%


Absolute (%) -1.5 -16.9 -46.5

Relative (%) 1.2 -20.4 -50.8

Richard COLES

T (61) 2 9043 7911

E [email protected]

Steven SASSINE, CFA

T (61) 2 9043 7905

E [email protected]


– N/A

Financial Summary FY18A FY19A FY20F FY21F FY22F

EBIT (A$m) 553 554 540 567 587

Net Profit (A$m) 323 308 386 406 420

Normalised EPS (A$) 64.2 56.0 54.5 56.7 58.2

Normalised EPS Growth -2.3% -12.8% -2.7% 4.1% 2.6%


DPS (A$) 35.5 35.5 35.5 36.4 37.4

Dividend Yield 5.3% 5.3% 5.3% 5.5% 5.6%

P/BV (x) 1.1 1.1 1.1 1.0 1.0

ROE (%) 12.4% 11.3% 10.5% 10.5% 10.4%

39.0

56.5

74.0

91.5

109.0

5.7

7.7

9.7

11.7

13.7


Source: Bloomberg

5

10

15

20


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http://www.efa.biz/

http://www.efa.biz/

Financial Services - Others│Australia│Equity research│August 13, 2019


Powered by EFA

Magellan Financial Group

Going direct to the source

MFG delivered a very strong FY19 result (in-line with expectations), with management fees up 24% on pcp; underlying NPAT +35%; and DPS +37%.

MFG launched an underwritten A$275m institutional placement to support current growth initiatives and provide very strong balance sheet flexibility.

A new High Conviction LIT has been launched, with MFG funding investor incentives (7.5% loyalty bonus). MFG is building a substantial direct investor platform which it expects to leverage significantly in the future.

MFG’s ‘bottom-up’ growth initiatives (leveraging its growing retail client base and balance sheet strength) can deliver significant medium-term FUM growth. However, trading on ~27x FY20F PE (~35% above its medium-term average), we view the stock as susceptible to any short-term market volatility. We retain a Hold recommendation with a price target of A$57.80ps.

Strong year: underlying EPS +33%; DPS +37% MFG reported FY19 underlying NPAT of A$364.2m, up 35% on the pcp and in-line with expectations (forecast A$370.8m). A 2H19 dividend (final and performance fee div) of 111.4c was declared, up 24% on the pcp (FY dividend up 37.7% on pcp). Management fee growth of 24% (to A$472.5m) increased broadly in-line with average FUM (+28% on the pcp), with the average base management fee slightly diluted to 62.3bp (from 64.6bp pcp) from a higher Insto FUM mix. Closing June-19 FUM of A$86.7bn was up 24.8% on the pcp and +14.3% on average FY19 FUM. Funds management divisional NPBT was A$459.8m, up 39% on the pcp (PBT pre performance fees was up 29% to A$376.2m).

A$275m placement; new LIT; and more ‘partnerships’ to come MFG ended the period with A$198m cash and ~A$339m of balance sheet investments. Adjusting for the dividend payable (~A$197m) and working capital, the group had ~A$95m of available capital (ex-investments). New capital raised will be used for the LIT investor incentives (dependent on the amount raised, noting the MGG expense was ~A$81m); A$50m to seed the upcoming retirement product; and to provide balance sheet flexibility. MFG has launched a new High Conviction (HC) LIT, mirroring the existing unlisted fund. MFG will incentivise take up via a 7.5% loyalty bonus (to MFG, MGG and existing HC fundholders). The loyalty bonus is being offered to a select set of MFG products that will limit churn (only the current fund is open ended). Around ~70,000 unit holders eligible for the bonus. MFG intends to increasingly utilise and leverage this ‘partnership’ model with its direct investors (the retirement income product is expected to launch in 6-12 months and we would expect similar incentives). The group’s ability to continue to deliver solid net inflows over FY20/21 looks solid on the back of: 1) US sustainable strategies (~US$20bn capacity); 2) Infrastructure Fund has ~US$6bn remaining capacity; 3) continued focus on /offering to self-directed retail (~65,000 holders in listed funds and growing); and 4) retirement income to be launched in 6-12 months.

Hold recommendation based on short-term valuation Following forecast changes, our valuation (DCF/PE) rises to A$57.80 (from A$49.22). Given the strong share price run and premium short-term valuation metrics (~27x PE vs ~20x medium-term average) the stock is susceptible to any meaningful market pull-back. However, we retain a Hold recommendation given the quality of MFG’s earnings (solid inflows, sticky FUM base) and growth optionality from new products and a strong balance sheet. Key risks include a severe market downturn and sustained investment underperformance leading to material outflows.

SOURCE: MORGANS, COMPANY REPORTS

▎Australia




Up/downside: -3.4%

Reuters: MFG.AX

Bloomberg: MFG AU


A$10,595m


A$40.38m

Current shares o/s 171.7m

Free float: 75.0%


Absolute (%) 5 36.3 113.8

Relative (%) 7.7 33 110

Scott MURDOCH

T (61) 7 3334 4516

E [email protected]


– N/A

Financial Summary Jun-18A Jun-19A Jun-20F Jun-21F Jun-22F

Revenue (A$m) 449.9 574.3 639.0 704.3 767.2

Operating EBITDA (A$m) 350.6 470.7 520.9 580.9 637.3

Net Profit (A$m) 268.9 364.2 401.2 448.5 493.2

Normalised EPS (A$) 1.56 2.06 2.20 2.46 2.71

Normalised EPS Growth 36.5% 32.2% 7.0% 11.8% 10.0%


DPS (A$) 1.36 1.85 2.04 2.28 2.50

Dividend Yield 2.26% 3.10% 3.41% 3.81% 4.18%

EV/EBITDA (x) 29.14 22.06 20.24 18.09 16.44

P/FCFE (x) 59.26 31.30 34.86 25.60 23.12

Net Gearing (27.3%) (27.0%) (35.9%) (37.1%) (38.5%)

P/BV (x) 16.99 14.43 11.17 10.58 10.00

ROE 50.6% 53.8% 47.0% 44.7% 46.6%

% Change In Normalised EPS Estimates (1.11%) 3.11% 5.24%


80

108

136

164

192

220

18.0

28.0

38.0

48.0

58.0

68.0


Source: Bloomberg

1

1

2

2


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http://www.efa.biz/

http://www.efa.biz/

Company Note Property Development │ Hong Kong │ August 13, 2019



Insert Insert

CIFI Holdings

Solid growth on stable margins

■ CIFI’s 1H19 core profit rose by 17% yoy with interim DPS up 43% yoy. We think it could slightly beat its FY19F contracted sales target.

■ It increased its average project stake to 74% for new land acquired, which should enable it to have better control over project completion and quality.

■ Maintain Add with a lower TP of HK$7.0, based on a 50% discount to NAV.

1H19 interim DPS rose by 43% yoy CIFI's core profit for 1H19 was in line with our estimate at Rmb2.9bn, up 17% yoy, driven

by higher gross margin (GPM) and higher profit contribution from JV projects. Interim

DPS grew by 43% yoy to HK$0.10.

Could slightly beat its FY19F contracted sales target CIFI's contracted sales grew by 31% yoy in 7M19 to Rmb103bn, while the sell-through

rate was 60% for 1H. We think it could beat its FY19 sales target of Rmb190bn by 5-10%

based on the current sell-through rate. As of end-Jun 19, its consolidated unbooked sales

amounted to Rmb70bn, meaning that it has locked in almost 100% of its FY19F earnings.

Expect stable profit margins on solid sales growth Its adjusted overall GPM was high at 33.5%, or 1% above our estimate, thanks to solid

property sales GPM and a higher proportion of revenue from project management than in

1H18. Management reiterates its guidance of 25-30% GPM for property sales and core

profit margin of 10-12% in the medium term, which it deems appropriate given its high

asset turnover strategy.

Increased average stake enables better control of projects CIFI increased its average stake in landbanking from 54% in FY18 to 74% in 1H19, which

should enable it to have better control over project completion and quality. It currently has

total land bank of 46.8m sqm and a pipeline of about 16m sqm for urban redevelopment.

Stable foreign debt exposure and stable borrowing cost CIFI has maintained stable foreign debt exposure, with 39% of total debt denominated in

non-Rmb as at end-Jun 19 (end-FY18: 42%). Its average borrowing cost remained stable

at 5.9%. Management does not worry about the tightened onshore credit market for

developers, and is confident that CIFI will be one of the non-state-owned developers with

the lowest average borrowing cost within the industry.

Maintain Add with a lower TP of HK$7.0 We tweak FY19-20F EPS forecast by +2% to -2% after updating CIFI’s land bank and

sales booking schedule. Maintain Add with a lower TP of HK$7.0, based on a wider 50%

discount (40% previously) to NAV of HK$14.0 in view of weaker equity market sentiment.

Potential catalyst: higher-than-expected contracted sales. Key downside risks are a

further slowdown in China’s economy and further depreciation of the Rmb vs. HK$.


Hong Kong

ADD (no change)


Current price: HK$4.22

Target price: HK$7.00

Previous target: HK$7.20

Up/downside: 65.9%

CGS-CIMB / Consensus: 3.8%

Reuters: 0884.HK

Bloomberg: 884 HK


HK$33,271m


HK$91.91m

Current shares o/s: 7,884m



FY19F EPS increased by 2%.

FY20F EPS decreased by 2%.

Source: Bloomberg


Absolute (%) -24.9 -16.9 -6.6

Relative (%) -16.2 -7.9 0.4

Major shareholders % held Lin's Family Fund 57.3

Ping An Insurance 9.9

Insert

Analyst(s)

Raymond CHENG, CFA

T (852) 2539 1324 E [email protected]

Will CHU T (852) 2539 1327

E [email protected]

Jeffrey MAK T (852) 2539 1328 E [email protected]


Total Net Revenues (Rmbm) 31,824 42,368 55,841 73,304 87,998

Operating EBITDA (Rmbm) 6,744 7,338 10,417 12,914 15,296

Net Profit (Rmbm) 4,828 5,624 7,487 8,700 10,054

Core EPS (Rmb) 0.57 0.72 0.93 1.08 1.25

Core EPS Growth 35.3% 26.1% 28.8% 15.7% 16.0%

FD Core P/E (x) 6.64 5.27 4.09 3.54 3.05

DPS (Rmb) 0.20 0.26 0.32 0.37 0.42

Dividend Yield 5.3% 6.9% 8.3% 9.7% 11.1%

EV/EBITDA (x) 8.02 11.22 8.12 7.15 6.51

P/FCFE (x) 42.16 NA 1.80 2.43 2.12

Net Gearing 50.9% 67.2% 57.8% 56.6% 53.7%

P/BV (x) 1.17 1.00 0.82 0.66 0.54

ROE 20.5% 20.4% 21.9% 20.7% 19.6%

% Change In Core EPS Estimates 2.39% (1.61%) 0.35%

CGS-CIMB/Consensus EPS (x) 1.06 1.00 0.95

68.0

85.5

103.0

120.5

138.0

2.60

3.60

4.60

5.60

6.60

Price Close Relative to HSI (RHS)

50

100


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Company Note Gaming │ Hong Kong │ August 13, 2019



Insert Insert

Galaxy Entertainment

Good luck in 2Q19

■ 2Q19 adjusted EBITDA was flat yoy at HK$4.3bn, 6% above our forecast due to a favourable win rate.

■ We estimate that GEG lost market share on a yoy basis in mass and VIP, but its market share loss stabilised during the quarter on a quarterly basis.

■ We lower our TP multiple to 14x FY19F EV/EBITDA from 16x previously. Maintain Add as the stock is already at its recent technical low valuations.

2Q19 beat expectations due to positive luck 2Q19 adjusted EBITDA of HK$4.3bn (0% yoy, 9+% qoq) beat our expectation by 6% due

to favourable hold in junket and direct VIP. On a hold normalised basis, adjusted EBITDA

of HK$4bn was in line with our forecast. Adjusted EBITDA margin reached an all-time

high of 32.9% (+180bp yoy, +240bp qoq) due to better hold rate. On a yoy basis, based

on all gaming companies’ reported data, GEG’s 2Q19 VIP/mass gross gaming revenue

(GGR) growth of -25%/+7% underperformed the broader VIP/mass' -13/+12%.

Market share loss stabilising We estimate that GEG lost about 4% pts and 1% pt VIP and mass market share on a yoy

basis, respectively, mainly to Melco and MGM China as the latter two operators ramped

up new capacity. However, on a qoq basis, GEG gained 1% pt market share in VIP and

was flat in mass market share which we view as positive as the worse of GEG’s market

share loss has likely occurred. GEG is undergoing both gaming and non-gaming property

enhancements which will be completed next year and could further stabilise market share

in the midst of new competition. We are estimating flat adjusted EBITDA growth for GEG

in FY19F and 7% growth in FY20F.

All about the macro Management indicated that VIP weakness is likely to persist through till the end of the

year due to a combination of weak macro factors. Within mass, the premium side of the

segment remains soft with mid-end mass being the strongest. This is consistent with our

table surveys which show table closures in VIP and members-only premium mass rooms

but main mass floor tables still open and minimum bets remaining strong. During the

quarter, GEG closed two VIP rooms and reduced VIP capacity by around 10%.

Management guided that its strong volumes in low and middle-end mass have made up

for the weakness in premium mass.

Reduce target valuation multiple to reflect macro uncertainty We base our target price on SOP, implying 14x FY19F EV/EBITDA (in line with historical

6-year average) vs. 16x previously (1 s.d. above 6-year average). Our target multiple is

reduced to reflect greater concerns on macro instability. We maintain our Add call as

GEG is now trading near 11x Bloomberg consensus EV/EBITDA, near a recent technical

floor level for the stock. Downside risks to our view are weaker-than-expected sector

GGR or continued erosion in macro sentiment.


Hong Kong

ADD (no change)





Up/downside: 32.4%


Reuters: 0027.HK

Bloomberg: 27 HK


HK$191,931m


HK$516.5m




No changes

Source: Bloomberg


Absolute (%) -20.8 -18.5 -23.4

Relative (%) -12.1 -9.5 -16.4

Major shareholders % held City Lion 22.5 Che-Woo Lui 9.0 Capital Group 9.0

Insert

Analyst(s)

Michael TING

T (852) 2532 1121

E [email protected]

Danny CHEN T (852) 2539 1350 E [email protected]


Revenue (HK$m) 48,640 55,211 55,635 54,779 56,474

Operating EBITDA (HK$m) 13,171 15,686 16,286 16,473 17,153

Net Profit (HK$m) 10,504 13,507 13,151 13,208 13,918

Core EPS (HK$) 2.45 3.12 3.03 3.04 3.21

Core EPS Growth 66.2% 27.7% (2.9%) 0.4% 5.4%

FD Core P/E (x) 18.11 14.18 14.62 14.55 13.81

DPS (HK$) 0.59 0.91 0.88 0.89 0.93

Dividend Yield 1.32% 2.04% 1.99% 2.00% 2.11%

EV/EBITDA (x) 13.77 11.70 11.19 10.91 10.25

P/FCFE (x) 17.1 113.9 29.4 30.1 25.1

Net Gearing (13.9%) (11.1%) (12.5%) (14.2%) (16.8%)

P/BV (x) 3.44 3.09 2.71 2.40 2.13

ROE 20.6% 22.9% 19.8% 17.5% 16.3%

% Change In Core EPS Estimates 0% 0% 0%


80.0

85.0

90.0

95.0

100.0

105.0

38.0

43.0

48.0

53.0

58.0

63.0


20

40

60


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Company Note Property Investment │ Hong Kong │ August 13, 2019



Insert Insert

Hysan Development

A key victim of HK’s political unrest

■ Hysan’s 1H19 results were in line with our expectations.

■ Its sales are showing signs of weakening, with a double-digit yoy decline in Jul. We expect turnover rent contributions to drop in 2H19F.

■ Trading at trough valuations, but its CWB retail portfolio is heavily affected by the ongoing protests in HK. Maintain Hold with a lower TP of HK$35.5.

1H19 results in line Hysan’s 1H19 core profit rose 9% yoy, in line with our expectations, mainly driven by the

new contribution from Lee Garden Three. Turnover increased 9% yoy to HK$2.0bn, with

rental margin also improving slightly to 88.6% (1H18: 88.3%). Interim dividend remained

flat at HK$0.27/share. Net gearing increased slightly to 4.9% (end-2018: 4.7%).

Early signs of weakening retail sales Its tenant sales rose 4% yoy growth in 1H19, notably outperforming the overall HK retail

market (-2.6% yoy) and other Causeway Bay malls (e.g. Times Square: -4% yoy) despite

the group's focus on high-end retail. Management attributed the solid performance to the

resilience of Hysan Place and the opening of Lee Garden Three offices which attracted

new footfall. Nevertheless, the continual protests in HK are starting to leave a negative

impact on retail sales, with Hysan estimating a low-teen yoy decline in Jul tenant sales.

Expect much lower contributions from turnover rent in 2H19F Turnover rent amounted to HK$49m in 1H19, down 9% yoy and accounted for 4.9% of

Hysan’s retail revenue during the period. Given the sharp deterioration in retail sentiment,

we expect Hysan's turnover rent contribution to decline substantially in 2H19F to

HK$15m (-69% hoh, -44% yoy). Overall, we estimate turnover rent to account for c.3.5%

of Hysan’s retail revenue in FY19F, vs. 4.2% in FY18.

Diversification of office tenant mix continues Hysan’s office turnover rose 13% yoy (or 9% yoy excluding the new contribution from Lee

Garden Three). Rental reversion was solid at a mid-teen level, benefitting from the

decentralisation trend among corporates. Meanwhile, Hysan has continued to diversify its

tenant mix, with co-working space now taking up 10% of its office space.

Maintain Hold with a lower TP of HK$35.5 Hysan’s share price has corrected 19% since the large-scale protests in HK began in

Jun. It is currently trading at 58% discount to NAV, representing the trough levels of the

past five years. Nevertheless, we expect the continued protests to be a drag on Hysan’s

Causeway Bay (CWB)-focused retail portfolio and limit its share price performance in the

near term. We maintain our Hold call. Our new TP of HK$35.5 is based on a 55%

discount to NAV (widened from 50% previously). Key downside risks to our call include

further deterioration in political conditions, while upside risks include the government

acceding to the protesters’ demands in the near term.


Hong Kong

HOLD (no change)





Up/downside: 8.2%


Reuters: 0014.HK

Bloomberg: 14 HK


HK$34,327m


HK$45.96m




No major changes

Source: Bloomberg


Absolute (%) -19.6 -23.1 -20.6

Relative (%) -10.9 -14.1 -13.6

Major shareholders % held Lee Hysan family 41.1

Insert

Analyst(s)

Raymond CHENG, CFA


Jeffrey MAK T (852) 2539 1328

E [email protected]

Will CHU T (852) 2539 1327 E [email protected]


Total Net Revenues (HK$m) 3,548 3,890 4,017 4,131 4,215

Operating EBITDA (HK$m) 3,705 6,672 3,152 3,235 3,293

Net Profit (HK$m) 3,636 6,033 2,597 2,701 2,782

Core EPS (HK$) 2.25 2.41 2.48 2.58 2.66

Core EPS Growth (0.71%) 7.23% 3.00% 4.00% 2.99%

FD Core P/E (x) 14.60 13.61 13.22 12.71 12.34

DPS (HK$) 1.34 1.44 1.48 1.54 1.58

Dividend Yield 4.08% 4.40% 4.51% 4.69% 4.83%

EV/EBITDA (x) 12.43 11.42 11.19 10.68 10.28

P/FCFE (x) 18.87 20.11 11.94 19.53 17.76

Net Gearing 4.13% 4.22% 3.67% 3.08% 2.50%

P/BV (x) 0.49 0.46 0.45 0.45 0.44

ROE 3.42% 3.49% 3.46% 3.55% 3.60%

% Change In Core EPS Estimates 0.77% 1.12% 1.19%


86.0

93.1

100.3

31.0

36.0

41.0


2

4

6


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Company Note Technology - Others │ Hong Kong │ August 13, 2019



Insert Insert

PAX Global Technology Ltd Market share gains should continue globally

■ PAX’s 1H19 net profit jumped 26% yoy to HK$325m which was above at 57% of our previous full-year FY19F forecast.

■ We expect slower revenue growth of c.10% in 2H19F due to decrease in demand in Latin America and solid GPM outlook.

■ With net cash on hand of HK$2.74bn, PAX trades at a very attractive valuation of 4.5x FY20F P/E. Maintain Add with a higher TP of HK$5.73.

1H19 net profit jumped 26% yoy due to stabilised GPM PAX Global Technology’s (PAX) 1H19 net profit jumped 26% yoy to HK$325m, driven by

26% revenue growth and stable gross profit margin (GPM) of 38.6%, thanks to strong

overseas sales (+39% yoy) though China market fell 44% yoy. As at 30 Jun 2019, the

group has a net cash position of HK$2.74bn, or HK$2.49/share, thanks to strong EBITDA

of HK$359m (+35% yoy) in 1H19.

Achieved revenue growth in all regions except China Overseas sales accounted for 93% of total revenue in 1H19 and continue to lead growth.

All regions including LACIS (Latin America, +50% yoy), EMEA (Europe and Middle East,

18% yoy), APAC (Asia Pacific, +58% yoy) and USCA (the US and Canada, +9% yoy)

achieved revenue growth in 1H19 due to continuous market share gains. Latin America’s

largest contributor, the Brazillian market, was particularly strong due to robust demand for

traditional and smart terminals. The group also recorded strong sales in the UK,

Germany, Poland and Italy due to increasing penetration in SmartPOS and Smart ECR

solutions. PAX also met strong demand for Android-based terminals and Smart ECR

terminals in the Asia Pacific region.

GPM outlook remains solid in 2H19F GPM merely improved by 0.1% pt to 38.6%, underpinned by strong overseas sales and

new product launches. We expect its GPM to stay at c.38.5-39% in 2H19F due to

sustainable product mix improvement, thanks to higher output of new products such as

Android based terminals, Android-based PayDroid OS and unattended POS etc.,

Nevertheless, we expect slower revenue growth of c.10% in 2H19F due to lower market

demand in Latin America as the key customers has completed their procurement. We

raise our FY19-21F EPS forecasts by 3.5-7.6% in due to higher revenue and GPM

assumptions as we assume stronger sales growth and margin achievement in LACIS

markets.

Maintain Add with a higher target price of HK$5.73 With a strong net cash position of HK$2.74bn and 14% EPS CAGR in FY19-21F, PAX

trades at a very attractive valuation of 4.5x FY20F P/E. We lift our target price to HK$5.73

due to earnings upward revision, still based on 9x FY20F P/E (30% discount to peers).

We believe re-rating catalysts are robust revenue growth and stablised GPM outlook.

Risks are keener competition in China and globally.


Hong Kong

ADD (no change)





Up/downside: 99.0%


Reuters: 0327.HK

Bloomberg: 327 HK


HK$3,169m


HK$2.18m




FY19-21F revenue increased by 16-18%.

FY19-21F GPM increased by 0.6-0.7% pts.

FY19-21F EPS increased by 3.5-7.6%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -6.8 -14 -25

Relative (%) 1.9 -5 -16.6

Major shareholders % held Hi Sun Technology (China) Limited 32.9 Kopernik Global Investors LLC 8.4 Templeton Investment Counsel, LLC 6.0

Insert

Analyst

Ray KWOK



Revenue (HK$m) 3,591 4,415 5,163 5,837 6,612

Operating EBITDA (HK$m) 583.6 616.9 707.4 787.2 875.2

Net Profit (HK$m) 407.5 522.5 603.6 700.6 780.4

Normalised EPS (HK$) 0.50 0.47 0.57 0.64 0.71

Normalised EPS Growth (8.6%) (4.2%) 19.8% 11.9% 11.4%


DPS (HK$) 0.08 0.08 0.09 0.11 0.12

Dividend Yield 2.81% 2.79% 3.21% 3.73% 4.15%

EV/EBITDA (x) 1.73 1.60 0.58 0.11 (0.31)

P/FCFE (x) NA 76.36 8.52 7.86 7.13

Net Gearing (55.2%) (51.1%) (54.9%) (55.1%) (55.1%)

P/BV (x) 0.81 0.75 0.63 0.57 0.51

ROE 14.9% 12.8% 13.6% 13.3% 13.2%

% Change In Normalised EPS Estimates 7.59% 3.51% 3.50%


69.0

83.1

97.1

111.2

2.60

3.10

3.60

4.10


5

10

15

20


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Company Note Auto Parts │ India │ August 14, 2019



Insert Insert

Bharat Forge

A tough quarter is behind

■ 1Q consolidated EPS fell 26% yoy to Rs3.7, marginally below at 14% of our FY20F estimate. Net debt eased 10% qoq.

■ Management guides for a recovery in exports from a low in 1Q with the help of new order wins, while slowdown in domestic truck demand to persist in 2Q.

■ We cut EPS by 5-8% for FY20-22F as we expect a sharp industry slowdown. Maintain Add with a lower DCF-based TP of Rs511 due to EPS cuts.

Weak 1Q performance as expected Standalone EBITDA dipped 19% yoy in 1QFY3/20 to Rs1.7bn, on a 9% dip in net sales,

which was in line with our estimate but below Bloomberg consensus estimate. However,

higher interest expense led to a 26% yoy dip in normalised PAT to Rs1.74bn, 2% below

estimate. Net debt reduction continued on a qoq basis (-10%) to Rs13.2bn, due to tight

cost control measures.

Management conference call highlights Management indicated that the worst of oil & gas component inventory reductions by

clients has passed and it expects export revenue to improve from 2Q. However, it

expects domestic truck component demand to remain weak until end-2Q. Management

indicated new order wins of US$30m in 1Q and it is on course to start production at its

aluminium forging facility in Nellore in 2Q.

International operations should gain from restructuring Wholly-owned subsidiaries operating internationally delivered PBT loss of Rs80m in 1Q,

as sales dipped 7% yoy. Management guided for a continued restructuring of its

European operations and capacity addition at its highly profitable (5-6% PBT margin)

aluminium forging capacity. Consolidated entity net profit dipped 26% yoy to Rs1.8bn in

1Q on the back of a 4% dip in net sales.

FY20-22F EPS cut by 5-8% Given the short-term demand downtrend in India, we cut consolidated entity sales by 4-

5% for FY20-22F, leading to EPS cuts of 5-8%. We believe the company will emerge

stronger from the current situation given management’s experience in handling a severe

cyclical demand slowdown in the past through tight cost control and new client wins.

Maintain Add with a lower TP Its share price has corrected in anticipation of the impact of a slowdown in end-user

demand on its financials. This makes its valuations attractive, with P/BV at near -1 s.d.

below its 10-year mean. Management's strategy to expand its client base and new

growth segments could limit the impact of a demand slowdown. We reiterate Add, with a

lower DCF-based TP of Rs511 (WACC: 11.7%), implying a 30% discount to 10-year

mean P/BV of 4.1x. Key risk to our call is a sustained downtrend in global or India vehicle

demand impacting sales.


India

ADD (no change)


Current price: Rs400.5

Target price: Rs511.0

Previous target: Rs568.0

Up/downside: 27.6%


Reuters: BFRG.BO

Bloomberg: BHFC IN


Rs186,440m


Rs651.6m




Net sales cut by around 5% in FY20-22F.

EBITDA cut by 4-7% for FY20-22F.

EPS cut by 5-8% for FY20-22F.

Source: Bloomberg


Absolute (%) -13.4 -11.2 -34.2

Relative (%) -8.1 -10.1 -31.7

Major shareholders % held Kalyani Family 45.8 LIC 3.5 Reliance Equity opportunities Fund 4.0

Insert

Analyst(s)

Pramod AMTHE

T (91) 22 4880 5167

E [email protected]

Pravin YEOLEKAR T (91) 22 4880 5152 E [email protected]

Financial Summary Mar-18A Mar-19A Mar-20F Mar-21F Mar-22F

Revenue (Rsm) 83,577 101,457 105,313 116,775 130,841

Operating EBITDA (Rsm) 17,230 20,556 21,379 23,939 27,477

Net Profit (Rsm) 7,779 10,054 11,845 13,546 15,584

Core EPS (Rs) 17.69 21.97 25.44 29.09 33.47

Core EPS Growth 29.4% 24.2% 15.8% 14.4% 15.0%

FD Core P/E (x) 22.64 18.23 15.74 13.77 11.97

DPS (Rs) 4.50 5.00 5.00 6.00 7.00

Dividend Yield 1.12% 1.25% 1.25% 1.50% 1.75%

EV/EBITDA (x) 11.68 10.07 8.97 7.77 6.59

P/FCFE (x) 120.7 41.1 21.3 74.2 57.2

Net Gearing 63.0% 65.6% 31.6% 23.7% 18.0%

P/BV (x) 4.01 3.47 2.63 2.30 2.00

ROE 18.8% 20.4% 19.0% 17.8% 17.9%

% Change In Core EPS Estimates (8.23%) (6.82%) (4.96%)


62.0

79.1

96.3

113.4

370

470

570

670

Price Close Relative to SENSEX (RHS)

5

10

15


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Company Note Auto Parts │ India │ August 13, 2019



Insert Insert

Bosch Ltd

A prolonged business restructuring

■ 1Q EPS dipped 16% yoy to Rs119 and formed 20% of our FY20F estimate, as lower depreciation and tax helped cover up a 4% shortfall in EBITDA.

■ Management says the Indian auto sector is in a structural slowdown. We feel the expected market share loss in diesel could have a significant impact.

■ We cut FY20-21F PAT by 6-10% and reiterate a Reduce rating with a lower TP based on 20x 1-year forward P/E (30% discount to 10-year mean).

Sharp slowdown in OEM impacted 1Q Bosch’s 1QFY3/20 EBITDA dipped 23% yoy and 7% qoq to Rs4.8bn, 4% below our and

11% below Bloomberg consensus. Net sales dipped 13.5% yoy to Rs27.8bn (4% below

our estimate). EBITDA margin fell 220bp yoy to 17.4%. 1QFY20 normalised PAT

declined 16% yoy to Rs3.6bn, in line with our estimate due to lower depreciation (-20%

yoy) and tax expense. Restructuring expense of Rs821m led to reported PAT of Rs2.8bn.

Underperformance in diesel systems likely to worsen Bosch’s underperformance in MHCV diesel systems (Fig 4) has been pronounced

throughout the transition to BS IV norms, and we believe it could worsen as the majority

of spend is skewed towards after-treatment systems, where global players like Cummins

(Fig 6), Furecia and Tenneco have an advantage. Its largest client in diesel systems,

Maruti, plans to stop using diesel engines for compact cars in the coming quarters, which

we believe could be a permanent change.

Benefits of gasoline expansion likely to be negligible Management’s efforts to develop gasoline engine systems may not be a big driver of

profitability given the current poor profitability trend among competitors (Denso, Keihin) in

India. Also, new entrants in segments with relatively low barriers to entry (six suppliers in

2W fuel injection, Fig 10) and bargaining power for OEMs could lead to low margins for

the segment. We expect EBITDA contribution of just 3% in FY22F from gasoline division.

Long drawn-out restructuring programme leads to sharp PAT cut Management guided that the Indian auto industry is undergoing a structural change

rather than just a cyclical downturn, as multiple factors have impacted vehicle demand.

Hence, it has implemented an employee restructuring programme, which will pay off over

a three-year period. We cut FY20F EBITDA by 12% due to expected market share loss.

Rich valuations ignore changing business dynamics; Reduce The sustained stock price correction has brought valuations to below mean P/BV, but we

believe absolute P/E is still rich at 23x FY21F considering 1) the sharp deceleration in

PAT to a 2-3% CAGR could continue until FY21F, 2) diesel systems no longer have a

high entry barrier and 3) the company plans to expand in businesses with low barriers to

entry like gasoline and EV systems. We lower our target P/E to 20x, leading to a Reduce

rating with 11% downside. Key risk is strong cost control leading to EPS outperformance.


India

REDUCE (no change)


Current price: Rs13,530

Target price: Rs12,114

Previous target: Rs14,688

Up/downside: -10.5%


Reuters: BOSH.BO

Bloomberg: BOS IN


Rs399,052m


Rs235.0m




Sales cut by 12-13% for FY20-21F

EBITDA cut by 12-15% for FY20-21F

EPS cuts limited to 3-6% due to benefits

from share buyback.

Source: Bloomberg


Absolute (%) -15.6 -21.3 -29.5

Relative (%) -10.3 -20.2 -27

Major shareholders % held Bosch Global 70.5 General Insurance 3.2 New India Assurance 2.8

Insert

Analyst(s)

Pramod AMTHE

T (91) 22 4880 5167

E [email protected]

Pravin YEOLEKAR T (91) 22 4880 5152 E [email protected]

Financial Summary Mar-18A Mar-19A Mar-20F Mar-21F Mar-22F

Revenue (Rsm) 116,901 122,578 127,972 143,162 161,032

Operating EBITDA (Rsm) 20,932 21,635 21,855 23,355 26,673

Net Profit (Rsm) 14,647 15,980 16,303 17,031 19,294

Core EPS (Rs) 479.9 532.6 552.8 577.5 654.3

Core EPS Growth 2.9% 11.0% 3.8% 4.5% 13.3%

FD Core P/E (x) 28.19 25.41 24.47 23.43 20.68

DPS (Rs) 100.0 105.3 150.0 175.0 190.0

Dividend Yield 0.74% 0.78% 1.11% 1.29% 1.40%

EV/EBITDA (x) 16.32 16.31 15.49 14.31 12.48

P/FCFE (x) 86.9 NA 106.9 178.9 338.5

Net Gearing (71.4%) (58.1%) (59.7%) (60.6%) (60.9%)

P/BV (x) 4.14 4.37 3.94 3.73 3.68

ROE 15.6% 16.7% 16.9% 16.3% 17.9%

% Change In Core EPS Estimates (2.77%) (6.34%)


71.0

89.8

108.5

12,000

17,000

22,000

Price Close Relative to SENSEX (RHS)

50

100

150

200


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13

Sector Flash Note Insurance │ India



Insurance - Life

Strong individual NBP growth

■ NBP for life insurers grew 6% yoy in Jul 2019. Overall APE growth was strong at 77% yoy.

■ Private sector players saw a 15% yoy increase in NBP and 20% yoy increase in APE, whereas LIC witnessed 3% yoy growth in NBP and 134% in APE.

■ Within our coverage universe, HDFCL witnessed 26% yoy growth in NBP, IPRU saw 18% yoy growth, and SBIL recorded 8% yoy growth.

Strong NBP growth for the industry ● New business premium (NBP) for the industry grew 6% yoy in Jul 2019 due to muted

group business growth. Individual NBP growth for private sector players was at 26%

yoy and for LIC at 18% in Jul 2019.

● Annualised premium equivalent (APE) growth was robust at 77% yoy in Jul 2019. The

overall APE growth for private sector players stood at 20% yoy, while LIC’s APE

expanded at a robust pace of 134% yoy.

● Industry NBP and APE rose 6% and 77% yoy, respectively, in Jul 2019.

Protection and annuity businesses driving individual NBP growth ● Our discussions with the management of insurance firms revealed that individual NBP

growth has been largely driven by the protection and annuity businesses. The non-par

savings product has also been driving incremental individual NBP growth. Meanwhile,

new products launched by HDFCL are driving incremental growth.

● In the group business, the credit protect and fund business remain the focus areas for

insurance companies. These products are incremental drivers of overall growth in the

group business.

Robust NBP growth for our coverage universe ● Within our coverage universe, HDFCL witnessed 26% yoy growth in NBP, IPRU saw

18% yoy growth, and SBIL recorded an 8% yoy growth rate in Jul 2019.

● HDFCL witnessed a robust 40% yoy growth rate in individual NBP, SBIL saw a strong

34% yoy increase, whereas IPRU's was flat at 4% yoy in Jul 2019.

● Overall APE growth for HDFCL was at 54% yoy in Jul 2019, IPRU’s APE grew by 3%

yoy and SBIL’s rose 19% yoy. Individual APE rose 58% yoy for HDFCL, -1% yoy for

IPRU and 24% yoy for SBIL.

Amongst life insurers, SBI Life remains our top pick ● We project a robust APE CAGR of 15-22% over FY19-21F for our coverage universe,

driven by strong growth in the protection business, which remains a focus area for the

companies.

● We are positive on life insurers given their attractive valuations, with SBI Life as our

top pick in the sector.

● We maintain Overweight on the sector. Key risks include lower-than-expected NBP

growth with increased competition in the protection business.

Figure 1: Valuation snapshot

As of 13

th August, 2019


FY18 FY19 FY20F FY18 FY19 FY20F FY18 FY19 FY20F

HDFC Life HDFCLIFE IN ADD 527 575 1,059.6 23.1% 24.6% 24.8% 7.0 5.8 4.8 21.5% 20.1% 21.5%

ICICI Pru Life IPRU IN ADD 396 405 567.5 16.6% 17.0% 17.6% 3.0 2.7 2.3 22.8% 20.2% 17.3%

SBI Life SBILIFE IN ADD 801 715 800.8 16.3% 17.7% 20.1% 4.2 3.5 3.0 17.8% 17.4% 18.4%

VNB margin (in %) P/EV (x) RoEV (in %)Particulars Ticker Reco

Price

(Rs/Sh)

TP

(Rs/Sh)

Mkt. cap

(Rs bn)

India

August 13, 2019 - 6:04 PM

Overweight (no change)


HDFC Life Insurance ADD, TP Rs575.0, Rs526.7 close

HDFC Life has a well-balanced product mix, in our view, with an increasing focus on the protection business. We believe the company’s fundamentals are improving, thanks to its higher cost efficiencies through digitisation initiatives and better persistency ratio.

ICICI Prudential Life Insurance ADD, TP Rs405.0, Rs395.5 close

ICICI Pru Life has a higher share of ULIPs relative to other large life insurers in India but its protection business is witnessing strong NBP growth from a low base. The company has seen substantial VNB margin improvement due to changes in product mix, better persistency ratio and lower opex.

SBI Life Insurance ADD, TP Rs715.0, Rs800.8 close

SBI Life has a strong bancassurance partner (parent company SBI) that only sells SBI Life’s products. Overall NBP growth for the company has remained strong over the past 2-3 years, with improving market share.


Insert

Analyst(s)

Siddharth TELI


Dhiren SHAH T (91) 22 4880 5170

E [email protected]

Saili CHHEDA T (91) 22 4880 5184 E [email protected]


HDFC Life Insurance 85.79 74.81 63.04

ICICI Prudential Life Insurance 33.92 32.24 30.22

SBI Life Insurance 61.51 52.56 43.74


HDFC Life Insurance 19.55 16.27 13.54

ICICI Prudential Life Insurance 7.78 7.22 6.69

SBI Life Insurance 10.91 9.35 7.99


HDFC Life Insurance 0.29% 0.30% 0.31%

ICICI Prudential Life Insurance 1.31% 1.13% 1.10%

SBI Life Insurance 0.28% 0.32% 0.38%

14

Company Note Oil & Gas Refinery │ South Korea │ August 13, 2019



Insert Insert

S-Oil Corp Key takeaways from Asia NDR

■ While investors at the Asia NDR wondered about diesel recovery from IMO impact, they were also conservative on overall refining demand.

■ We expect diesel spread recovery to start from 4Q19F on stock piling demand for low-sulphur fuel oil and blended diesel oil, a potential catalyst.

■ Maintain Add with an unchanged GGM-based target price of W110,000.

Areas of interest and concern We hosted a NDR for S-Oil in Singapore and Malaysia last week. We believe investors

are positive on the potential diesel price recovery from IMO 2020 impact, but we believe

concerns remain that this positive impact could be offset by the global economic

slowdown. Another area of interest was S-Oil’s dividend payout over the next 2 years

given its plan to reduce gross gearing to 80% and normalise capex (~W800bn).

When will IMO impact start in earnest We believe the International Marine Organisation (IMO) should release specific

guidelines for marine fuel oil sulfur contents in Oct 2019F for its new sulphur emission

cap for marine vessels. After the confirmation of compliance for IMO regulation, we

expect the refining traders to start building inventory for low sulphur fuel oil and blended

diesel oil from Nov onwards. We forecast Asia diesel spread to rise from US$15/bbl in

3Q19F to US$17/bbl in 4Q19F and US$19/bbl in 1H20F on strong restocking demand.

S-Oil should benefit from IMO’s new regulation While diesel prices should strengthen, we believe high sulphur fuel oil (HSFO) prices

should fall due to lower demand for HSFO given the new regulation. S-Oil has over 52%

middle distillate refining production yield (Diesel and Kerosene portion) (as at 2Q19).

While other refiners have only focused on expanding diesel production, S-Oil has gone

further to cut HSFO production output, in our view. Given the US4$/bbl increase in diesel

spread, we expect S-Oil’s refining margin to expand to US2$/bbl in 2020F.

Conservative on chemical outlook but new capacity normalising S-Oil guided the PX-naphtha spread could remain soft at US$300 in 2H19-2020F given

new supplies from China (2.5m tonnes p.a. for 2019-20F). However, as its new chemical

capacity (ODC, Olefin Downstream Complex 705k tonnes p.a.) normalises to over 95%

from 3Q19F (vs. utilisation of 48% at PP/PO plants in 2Q19), we believe its chemical

business could recover from the bottom. We expect operating profit (OP) contribution

from PX to fall to 10% in 2020F from 20% in 2019F with chemical diversification.

Maintain Add and target price of W110,000 We retain our GGM-based TP of W110,000 (based on 1.62x FY20F P/BV on 15% FY20F

ROE). We tweak 2019F NP by 1% to reflect slightly lower gasoline spread. We expect re-

rating from a recovery in refining margins in 4Q19-1H20F on IMO 2020. Risks are slower

growth in gasoline demand and a steady increase in refining throughput. Maintain Add.


South Korea

ADD (no change)


Current price: W88,700

Target price: W110,000

Previous target: W110,000

Up/downside: 24.0%


Reuters: 010950.KS

Bloomberg: 010950 KS


W9,986,094m


W23,795m




FY19F NP decreased by 1%

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -4.9 3.3 -24.2

Relative (%) 3.6 12.7 -7.8

Major shareholders % held Aramco Overseas Company B.V. 63.4

Insert

Analyst(s)

John PK PARK



Revenue (Wb) 20,891 25,463 24,892 24,755 24,498

Operating EBITDA (Wb) 1,668 993 1,333 2,080 2,139

Net Profit (Wb) 1,246 258 520 1,083 1,051

Normalised EPS (W) 11,072 2,292 4,618 9,619 9,336

Normalised EPS Growth 3% (79%) 102% 108% (3%)


DPS (W) 5,900 750 1,471 3,158 3,065

Dividend Yield 6.65% 0.85% 1.66% 3.56% 3.46%

EV/EBITDA (x) 7.54 15.74 11.27 6.99 6.64

P/FCFE (x) 40.91 NA 22.39 20.00 30.80

Net Gearing 38.4% 87.8% 72.8% 58.0% 49.6%

P/BV (x) 1.46 1.54 1.43 1.27 1.17

ROE 18.8% 3.9% 7.7% 14.6% 12.8%

% Change In Normalised EPS Estimates (0.75%) (0.27%) 0.00%


69.0

86.1

103.3

120.4

74,000

94,000

114,000

134,000

Price Close Relative to KOSPI (RHS)

1

1

2


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15

Sector Note Commodities │ Malaysia │ August 13, 2019



Agribusiness

What led to the recent run in CPO price?

■ Malaysian palm oil stocks fell 1% mom to 2.39m tonnes at end-Jul 2019, as strong exports and local usage offset the rise in production.

■ The stockpile was 3.5% and 3.2% below our and consensus forecasts, respectively, due to lower imports. We view this as a positive for CPO price.

■ We project 2.4m tonnes of CPO stock as at end-Aug 2019F, flattish mom.

■ We believe the recent rise in CPO price to a 4-month high was driven by strong exports and optimism that Indonesia will raise its biodiesel mandate.

Lower-than-expected imports trim stockpile in July Malaysia’s palm oil stocks fell 1% mom in Jul (+8% yoy) to a one-year low of 2.39m

tonnes as at end-Jul 2019. This was 3.5% below our projection of 2.48m tonnes and

3.2% below Bloomberg and Reuters’ consensus forecasts of 2.47m tonnes, due to higher

domestic consumption coupled with lower imports. We are positive on the latest figure as

stocks are kept in check despite the sharp 15% mom rise in production.

Production remains strong compared with year-ago level CPO production rose 15% mom in Jul (+16% yoy) possibly due to higher productivity at

the estates, as estate workers returned to work after celebrating the Eid al-Fitr festival.

Key to note is that palm oil production remained strong in Jul 2019 compared to a year

ago level, and has been tracking above our expectations. 7M19 production grew 11% yoy

to 11.5m tonnes, representing 57% of our full-year forecast of 20.3m tonnes (+4% yoy).

Strong exports and high local usage offset the stronger output Palm oil exports grew 7% mom and 24% yoy to 1.49m tonnes in Jul, driven by stronger

demand from India, Pakistan and the US due to CPO’s price attractiveness against its

key substitutes. On top of this, domestic palm oil usage rose 16% mom due partly to the

implementation of B7 (7% biodiesel content) mandate on the industrial sector effective 1

Jul 2019. Malaysian palm oil imports fell 64% mom to 37,000 tonnes in Jul 2019. In

7M19, palm oil imports jumped 68% to 569,000 tonnes.

Strong exports could keep a lid on stocks in August We project palm oil stocks to stay flattish at 2.4m tonnes at end-Aug 2019F as the higher

production was offset by stronger exports. We expect Aug palm oil output to increase 5%

mom and exports to improve 8% mom.

Recent CPO price improvement driven by demand factors CPO futures price rose 6% since the start of Aug to RM2,232 per tonne currently, its

highest since 5 Apr 2019. We believe the rise in CPO prices was driven by strong CPO

exports, lower-than-expected stocks in Aug, and optimism that Indonesia will raise its

biodiesel mandate to B30 by 2020 and B50 by 2030. We expect CPO prices to trade in

the range of RM1,900-2,200 per tonne in Aug. We keep our average CPO price forecast

of RM2,100 per tonne for 2019F. Key upside/downside risks to our call are higher/lower

CPO prices. Our picks in Malaysia are GENP and Hap Seng Plantations.

Figure 1: Historical relationship between CPO prices and stocks

SOURCES: CGS-CIMB RESEARCH, COMPANY

Malaysia

Neutral (no change)


Genting Plantations ADD, TP RM11.20, RM9.59 close

We like Genting Plantations for its rich land bank and young estates. The group has one of the youngest estate age profiles among its big-cap peers in Malaysia.

Hap Seng Plantations ADD, TP RM1.65, RM1.48 close

We like HSP as we take the view that the current implied low EV/ha of RM30k/ha for its RSPO-certified contiguous estates in Sabah could attract suitors and re-rate its share price in the medium term.

Kuala Lumpur Kepong HOLD, TP RM24.54, RM23.56 close

We expect KLK’s share price to be supported by the group’s strategic estate land bank in Malaysia.


Insert

Analyst(s)




Genting Plantations 36.09 26.64 25.86

Hap Seng Plantations 30.60 25.50 27.95

Kuala Lumpur Kepong 36.97 33.23


Genting Plantations 1.84 1.78 1.74

Hap Seng Plantations 0.71 0.71 0.70

Kuala Lumpur Kepong 2.43 2.38


Genting Plantations 1.81% 2.01% 2.51%

Hap Seng Plantations 2.03% 2.70% 3.38%

Kuala Lumpur Kepong 2.22% 2.54%

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,000

1,500

2,000

2,500

3,000

3,500

Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19

Stock (LHS) CPO price (RHS)('000 tonnes) (US$ /tonne)

16

Sector Note Automobiles and Parts │ Malaysia │ August 13, 2019



Autos

MITI appoints anchor company for NNCP

■ MITI last Friday appointed DreamEDGE as the anchor company for NNCP.

■ DreamEDGE expects to launch its first C-segment sedan NNCP in Mar 2021.

■ Daihatsu Motor Corp will provide support in advanced technology for NNCP.

DreamEDGE appointed as the Malaysian anchor company for NNCP International Trade and Industry Minister Datuk Darell Leiking announced last Friday that

DreamEDGE Sdn Bhd (unlisted) has been appointed as the Malaysian anchor company

to deliver the new national car project (NNCP) with advanced technology support from

Daihatsu Motor Company.

Targets first model prototype in Mar 2020, and launch in Mar 2021 DreamEDGE plans to release its first prototype of NNCP in Mar 2020 and launch its first

model in Mar 2021. According to DreamEDGE CEO Kharil Adri Adnan, the first model of

NNCP will likely be a C-segment sedan vehicle using hybrid technology. Malaysia's C-

segment sedan market is a mid-level category currently dominated by Japanese models,

such as with Honda Civic and Toyota Altis. Details on the level of partnership with

Daihatsu have not been finalised, but it will not involve an equity partnership structure.

Who is DreamEDGE? Datuk Darell highlighted that DreamEDGE was chosen as the anchor company for NNCP

because it has built a capable internal development team focused on technology

innovation, from conceptualisation to prototyping and mass production. DreamEdge is an

engineering design company focusing on advanced R&D in the fields of automotive,

robotics and 3D printing. It was founded in 2007 and is one of the products from the

government's Look East Programme. It currently employs more than 150 engineers.

DreamEDGE to utilise existing contract manufacturers for NNCP DreamEDGE intends to engage local contract manufacturers to utilise the excess

production capacity in the domestic auto industry. Moreover, this will help to speed up its

product development and manufacturing process in order to meet the Mar 2021 dateline.

Hence, it does not plan to build a new manufacturing plant for NNCP. Although

DreamEDGE did not reveal the potential investment value for the project, it indicated that

the total investment is expected to be “a few hundred million” ringgit. The group is still in

the midst of finalising its funding structure for the NNCP.

Too early to assess the potential impact; maintain Neutral NNCP could provide competition to the domestic auto industry if it could create attractive

products with competitive prices. However, we think the NNCP remains on a preliminary

stage as many details have yet to be finalised. We stay Neutral on the auto sector. Key

upside risks to our call are the strengthening of the ringgit vs. the US$ and Japanese yen,

a reduction in interest rate, and favourable new policies. Ringgit depreciation vs. US$ and

Japanese yen, interest rate hikes, and lack of new launches are key downside risks.

Figure 1: Timeline for NNCP

SOURCES: CGS-CIMB RESEARCH, MITI, DreamEDGE, PAULTAN.ORG

Malaysia

Neutral (no change)


Bermaz Auto Berhad ADD, TP RM3.30, RM2.44 close

Bermaz is our top pick in the Malaysian auto sector due to its robust growth prospects driven by new model launches, as a proxy for export growth, and for its attractive dividend yield. We expect 5% volume growth in FY4/20F, driven by new model launches, such as Mazda 3, CX-30 and CX-8. The stock also offers attractive 7.9-8.1% yields in CY19-20F.


Insert

Analyst(s)

Mohd Shanaz NOOR AZAM



Bermaz Auto Berhad 10.63 10.35 10.09


Bermaz Auto Berhad 4.75 4.43 4.14


Bermaz Auto Berhad 8.08% 7.94% 8.13%

17

Sector Note Telecommunications │ Malaysia │ August 13, 2019



Telco - Mobile How are U doing?

■ UM’s mobile service revenue grew a strong 14.3% yoy in FY18, with RMS rising 1.6% pts to 12.2%. EBITDA was positive at RM159m (FY17: RM12m).

■ Elevated capex of RM703m/867m in FY17/18. Net debt/EBITDA of 16.2x at end-FY18 may fall to a still-stretched 4-6x by end-FY20.

■ Stretched balance sheet, additional spectrum licence liabilities (FY20) and potential IPO in 2020-21 suggest UM will continue to compete rationally.

U are doing very well U Mobile’s (UM) mobile service revenue growth of 14.3% yoy in FY18 (FY17: +34.3%

yoy) outpaced the Big 3’s 0.4-3.1%. As such, its revenue market share (RMS) rose a

further 1.6% pts yoy to 12.2%. Higher revenue more than compensated for increased

opex related to its mobile network rollout, with FY18 EBITDA rising to RM159m (FY17:

RM12m) on a margin of 5.7%. However, core net loss widened 6.6% yoy to RM439m due

to higher depreciation (+37%) and interest cost (+41%). With wholesale fee expected to

fall 70-80% in FY19F and to nil by FY20F, we estimate UM could reach breakeven at net

profit level in FY20/21F, assuming 8-10% p.a. revenue growth.

U spent, now U owe As UM rolled out its own network to plug the gaps left from the termination of its RAN

sharing agreement with Maxis, its capex has risen from c.RM350m p.a. to RM703m/

867m in FY17/18 (capex/sales: 29-31%) (Digi: RM748m/685m, Celcom: RM1.3bn/1.1bn,

Maxis: RM1.0bn/1.0bn). This was largely funded by additional shareholders’ advances of

RM799m (to RM1.4bn at end-FY18) and incremental vendor financing of RM551m in

FY17-18. Including these and spectrum licence liabilities, net debt rose from RM128m at

end-FY14 to RM2.6bn at end-FY18, or a net debt/EBITDA of 16.2x.

U will be good UM’s capex is likely to ease in FY20 after its coverage rollout programme is completed in

FY19, in our view. With rising EBITDA, we estimate net debt/EBITDA could fall to 4-6x by

end-FY20, which is still quite stretched by regional standards (<2x). Moreover, UM’s

balance sheet may have to bear extra spectrum licence liabilities, if it manages to win any

of the spectrum allocated in 2020 (we estimate total RM500m-1bn for 700MHz and

2600MHz). Given its stretched balance sheet and potential IPO in 2021 (once net profit

turns positive), we believe UM is unlikely to be overly price aggressive and risk sparking

off a price war that would dent its EBITDA over the next two years.

U should stay Neutral on the Malaysian telco sector While the risk of UM sparking off a price war is remote, we believe mobile competition will

stay tight as the market remains overcrowded. Coupled with a mature market, we see

flattish mobile service revenue growth (ex-wholesale and interconnection) in FY19-21F.

Malaysian telcos trade at a 16% premium over the ASEAN average 2020F EV/OpFCF of

15.4x, with decent 2019-20F dividend yields of 3.3-3.5%. Downside/upside risks: more

intense competition/greater-than-expected value creation from M&As.

Figure 1: U Mobile's mobile service revenue trend

SOURCES: CGS-CIMB RESEARCH, COMPANY

Malaysia

Neutral (no change)


Maxis Berhad REDUCE, TP RM5.40, RM5.41 close

We believe Maxis will continue to face challenges in defending its lucrative postpaid business over the long run as competitors’ network quality/coverage catch up. The non-renewal of the U Mobile 3G RAN sharing contract is also a blow to its FY19-21F earnings.

Telekom Malaysia HOLD, TP RM3.40, RM4.09 close

We see TM’s core EPS rising 41.8% yoy in FY19F. Thereafter, we expect core EPS to grow by a more modest 3.7% yoy in FY20F, then ease 7.6% in FY21F, as revenue from its fixed line business stays under pressure.


Insert

Analyst(s)

FOONG Choong Chen



Maxis Berhad 26.83 26.39 24.29

Telekom Malaysia 17.14 16.53 17.90


Maxis Berhad 5.90 5.87 5.73

Telekom Malaysia 1.95 1.86 1.79


Maxis Berhad 3.70% 3.70% 3.70%

Telekom Malaysia 3.50% 3.63% 3.35%

138

457

907

1,253 1,351

1,753

2,355

2,690

0

500

1,000

1,500

2,000

2,500

3,000

2011 2012 2013 2014 2015 2016 2017 2018

(RM m)

18

Company Note Public Transportation │ Singapore │ August 14, 2019 Shariah Compliant



Insert Insert

ComfortDelGro

2Q19: Building a stable long-term ride

■ 1H19 net profit rose 3.5% yoy to S$146m, slightly below our and consensus expectations. Singapore taxi and weaker £ and A$ were the main drags.

■ FY19-21F EPS cut by 1.95-3.7% to reflect weakness in the taxi segment; strength in public transport services support overall growth outlook.

■ This note marks a transfer in analyst coverage. We continue to like CD for its stable long-term income streams. Maintain Add with lower TP of S$2.78.

Generally decent results, capped by weaker taxi segment 1H19 revenue/EBIT grew 5.9%/3.5% yoy mainly led by robust gains in the public

transport segment, with new acquisitions contributing S$13.7m to EBIT. But could have

been better if the weaker £ and A$ had not capped its public transport services earnings.

1H19 EBIT margin improved slightly to 11.5% (vs. 11.3% in 1H18). An interim dividend of

4.5Scts was announced (unchanged 66% payout).

Public transport services continue to drive growth ahead Its public transport business saw 22.2% growth in 1H19 operating profit (S$118m), driven

by i) higher SBS Transit mileage; ii) contributions from Australian acquisitions made last

year; and iii) and rail revenue following a 4.3% fare adjustment effective Dec 2018. If not

for weaker £ and A$, revenue would be higher. CD maintains a positive revenue growth

outlook for both its Singapore and Australian operations.

Taxi competition heats up CD's 1H19 taxi operating profit declined 7.1% yoy to S$58m (1H18: S$62m) as a result

of weaker Singapore taxi performance. Management said competition for drivers from

ride-hailing firms heated up in 2Q19. Ride-hailing firms were likely gearing up ahead of

passing of the new Point-to-Point (2P) Passenger Transport Industry Bill, in our view. CD

guided for negative revenue growth for the segment in 2H19F. However, we believe the

new regulatory framework will indirectly benefit CD in the longer term.

M&As on the horizon? Management said it is always on the look-out for M&As but is cognisant of the targets'

returns and country risks (e.g. strength of labour unions). It reiterated it has plenty of debt

headroom to fund acquisitions (still comfortable with 30% net gearing cap). In the interim,

it will prioritise the integration of acquired Australian bus business, which has boosted its

public transport services segment revenue. With regards to a Bloomberg article that CD

has made a bid for Arriva's assets, we believe Arriva's London Bus asset could be most

complementary to CD’s London bus segment (see overleaf).

Longer-term play; maintain Add We cut FY19-21F EPS by 1.9-3.7% to reflect lower taxi EBIT. Near-term volatilities in the

taxi business and forex aside, we like CD for its business model which is mainly led by a

stable public transport business. Our DCF-based TP dips to S$2.78 (WACC: 7.6%; LTG:

2%), implying total return of c.10% (6.1% share price upside, 4.4% dividend yield). Better

taxi earnings and forex are potential re-rating catalysts. Downside risks: intensifying

competition for its taxi business and worse-than-expected public service EBIT.


Singapore

ADD (no change)


Current price: S$2.62

Target price: S$2.78

Previous target: S$2.82

Up/downside: 6.1%


Reuters: CMDG.SI

Bloomberg: CD SP


S$5,674m


S$18.41m




FY19-21F EPS decreased 1.95-3.70%.

Source: Bloomberg


Absolute (%) -6.8 4 11.5

Relative (%) -1.6 5.5 13.4

Major shareholders % held Blackrock 7.0 Vanguard Group 2.7 Norges Bank 1.4

Insert

Analyst(s)

Cezzane SEE



Revenue (S$m) 3,576 3,805 3,930 4,033 4,154

Operating EBITDA (S$m) 818.0 828.0 876.3 908.3 939.7

Net Profit (S$m) 301.5 303.3 314.1 331.5 345.7

Core EPS (S$) 0.14 0.14 0.15 0.15 0.16

Core EPS Growth (7.79%) 1.63% 4.95% 5.56% 4.26%

FD Core P/E (x) 19.27 18.96 18.06 17.11 16.41

DPS (S$) 0.10 0.11 0.11 0.12 0.12

Dividend Yield 3.97% 4.01% 4.16% 4.39% 4.56%

EV/EBITDA (x) 7.07 7.33 6.86 6.54 6.25

P/FCFE (x) 20.44 23.02 16.84 15.81 15.43

Net Gearing (9.36%) (0.54%) (2.63%) (4.78%) (6.65%)

P/BV (x) 2.17 2.17 2.10 2.03 1.96

ROE 11.5% 11.4% 11.8% 12.1% 12.2%



87.0

94.8

102.6

110.3

118.1

2.00

2.20

2.40

2.60

2.80

Price Close Relative to FSSTI (RHS)

10

20

30


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Company Note Property Devt & Invt │ Singapore │ August 13, 2019



Insert Insert

Frasers Property Limited

Mixed performance

■ 9MFY9/19 core EPS was broadly in line, at 71% of our FY19 forecast.

■ Slower residential activities in Singapore and China partly offset by higherrental income. Higher residential handover in Australia scheduled for 4Q.

■ Maintain Add, with unchanged TP of S$2.08.

3QFY9/19 results highlights FPL reported 3QFY9/19 revenue of S$638.8m (-10% yoy) while reported PATMI came in

at S$333.9m (+68.2% yoy), with the inclusion of revaluation gains largely from Frasers

Tower. Excluding this, operating PATMI would have been S$74m (-55.8% yoy), dragged

down by lower Singapore, hospitality and Europe and rest of Asia strategic business units

(SBUs) as well as higher interest expense. 9MFY19 operating EPS of 8.9 Scts (PATMI of

S$313.9m) made up 71% of our FY19 forecast, broadly within expectations.

Slower residential contributions offset by improved rental income Singapore PBIT dipped 7.2% yoy in 3QFY19 on lower residential contributions even as

unbilled presales declined to S$0.2bn. This was partly offset by maiden contributions

from PGIM ARF, rental income from Frasers Tower and Northpoint City South Wing, and

increased REIT distributions and fee income. With the recently-launched Riviere

achieving an estimated 7% take-up rate to date and the divestment of 50% in Frasers

Tower, we anticipate Singapore SBU’s contribution to remain subdued in the near term.

Higher residential handovers scheduled for 4QFY19 Australia PBIT declined 46.6% yoy in 3QFY19, with a lower number of residential units

settled (245 units) and slower commercial & industrial (C&I) development earnings. While

the Australian residential market appears to be bottoming out, the volume of transactions

remains thin. The group sold 195 units in 3Q and plans to release a further 1,200 units,

mainly in NSW and Victoria, over the remainder of FY19. A further 890 units are

scheduled to be handed over in 4Q. Meanwhile, it continued restocking its residential and

industrial land bank in 3Q with the addition of 3,325 residential units in Victoria and the

securing of 53ha of industrial sites, thus extending the earnings visibility of this business.

Better performance from Thailand and Vietnam Hospitality, Europe and rest of Asia's PBIT continued to be under pressure in 3Q19 with

lower performance yoy due to divestment of industrial assets in 4QCY18 and lower China

development contributions and unbilled revenue of S$0.8bn, albeit partly offset by higher

income from Thailand and Vietnam. Nonetheless, the operating metrics of its industrial

and business parks in Europe and the UK remained robust with average occupancy rate

still at a high level of 80% and positive rental reversion of 5% YTD.

Maintain Add We tweak our FY19-21F core EPS by 0.4-0.7% post results and maintain our TP at

S$2.08, based on a 35% discount to RNAV. FPL’s net debt to equity ratio stood at 73.6%

at end-3QFY19, down from 83.8% a year ago, with c.14% of debt due to be refinanced in

FY20F. Active capital deployment is a potential re-rating catalyst while downside risks

include slower value unlocking activities due to weaker macro outlook. .


Singapore

ADD (no change)





Up/downside: 14.5%


Reuters: FRPL.SI

Bloomberg: FPL SP


S$5,315m


S$0.38m




FY19F core EPS decreased by 0.7%



Source: Bloomberg


Absolute (%) -2.7 -3.2 7.1

Relative (%) 1.8 -0.2 11.4

Major shareholders % held TCC 59.5 Thai Bev 28.5

Insert

Analyst(s)

LOCK Mun Yee


Financial Summary Sep-17A Sep-18A Sep-19F Sep-20F Sep-21F

Total Net Revenues (S$m) 4,036 4,307 4,218 3,490 2,930

Operating EBITDA (S$m) 961 1,093 1,000 828 785

Net Profit (S$m) 689.1 759.0 454.6 358.8 291.2

Core EPS (S$) 0.16 0.13 0.16 0.12 0.10

Core EPS Growth (2.0%) (18.9%) 22.0% (21.1%) (18.8%)

FD Core P/E (x) 11.55 14.24 11.67 14.81 18.25

DPS (S$) 0.086 0.086 0.086 0.086 0.086

Dividend Yield 4.73% 4.73% 4.73% 4.73% 4.73%

EV/EBITDA (x) 19.74 21.69 23.25 27.77 29.64

P/FCFE (x) 223.4 NA NA 16.7 NA

Net Gearing 70.6% 84.4% 79.0% 74.1% 73.4%

P/BV (x) 0.60 0.56 0.54 0.52 0.51

ROE 6.62% 5.12% 5.99% 4.49% 3.54%



97.0

101.4

105.9

110.3

114.8

1.500

1.600

1.700

1.800

1.900


1

1

2


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Company Note Tech Manufacturing Services │ Singapore │ August 13, 2019 Shariah Compliant



Insert Insert

Fu Yu Corp Ltd

Positive 2Q

■ 2Q19 net profit accounted for 28% of our previous full-year forecast, beating its past four years' historical average achievement of 16%.

■ Positives in 2Q19 results were higher gross margin and a higher interim DPS.

■ Given the continued ROE improvement, we raise our P/BV target to 1.0x vs. 0.9x previously.

Some positives despite yoy earnings decline 2Q19 sales fell 1.5% yoy while net profit fell 14% yoy to S$3.5m. 2Q/1H net profit

reached 28%/41% of our full-year forecasts, stronger than expected, given its past four

years' historical average achievement of 16%/32%. However, impact from US-China

trade tensions could distort the quarterly profit breakdown this year. The positives in Fu

Yu's 2Q19 results are 1) a high gross profit margin of 19.3%, up both yoy and qoq, due

to better cost control, efficiencies and a better product mix; 2) higher return on equity as

profitability improved; and 3) a higher interim DPS of 0.35 Scts vs. 0.30 Scts last year.

Singapore and Malaysia operations did well In the second quarter, its operations in Singapore and Malaysia saw revenue increase

yoy while its China operations continued to face revenue decline. By segment, its

consumer, medical and automotive segments did well while its printing/imaging,

networking and communications segments were weaker.

Strengthening Singapore presence Fu Yu has decided to renew the lease of its premises at 7 and 9 Tuas Drive 1 (Plot 9) for

a further term of 20 years from 2021. The group intends to redevelop Plot 9 and has

submitted its plans to the regulatory authorities. The preliminary estimated capital

expenditure is around S$13 million for this redevelopment project. In Malaysia, Fu Yu has

commenced a voluntary liquidation for its 40%-owned joint venture Berry Plastics

Malaysia Sdn Bhd. The group is open to further optimising its cost structure in the region.

Hold for yield Fu Yu offers a 7.67% dividend yield for FY19F. Its balance sheet remains robust with net

cash accounting for 51% of its market cap. We maintain our Hold call with a higher TP of

S$0.22 based on 1.0x FY19F BVPS (previously 0.9x P/BV, 3-year average) as ROE

improvement pulls through. If there is third-party interest to acquire Fu Yu and take it

private, that would be a bonus for shareholders, and an upside risk to our Hold call.

Downside risks are the impact of the US-China trade war on economic growth,

unfavourable foreign exchange movements and increased competition.


Singapore

HOLD (no change)





Up/downside: 1.5%


Reuters: FUYU.SI

Bloomberg: FUYU SP


S$161.9m


S$0.27m




FY19F core EPS raised by 3.01%.



Source: Bloomberg


Absolute (%) 0 4.9 22.9

Relative (%) 5.2 6.4 24.8

Major shareholders % held

Tam Wai 12.9 Ho Nee Kit 12.9

Ching Heng Yang 11.8

Insert

Analyst(s)

William TNG, CFA



Revenue (S$m) 195.0 197.7 210.7 216.4 223.5

Net Profit (S$m) 4.48 11.89 12.59 12.43 13.15

Core EPS (S$) 0.006 0.016 0.017 0.017 0.017

Core EPS Growth (57%) 165% 6% (1%) 6%

FD Core P/E (x) 36.10 13.62 12.86 13.02 12.31

Price To Sales (x) 0.83 0.82 0.77 0.75 0.72

DPS (S$) 0.015 0.016 0.017 0.016 0.016

Dividend Yield 6.98% 7.44% 7.67% 7.44% 7.44%

EV/EBITDA (x) 6.00 5.26 4.81 4.72 4.36

P/FCFE (x) 80.22 10.48 34.74 16.48 14.72

Net Gearing (53.2%) (51.1%) (47.9%) (47.5%) (47.5%)

P/BV (x) 0.98 0.99 0.99 0.98 0.98

ROE 2.65% 7.22% 7.66% 7.56% 7.96%

% Change In Core EPS Estimates 3.01% 0.42% 0.45%


92.0

102.0

112.0

122.0

0.160

0.180

0.200

0.220


5

10

15

20


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Company Note Professional Services │ Singapore │ August 13, 2019 Shariah Compliant



Insert Insert

HRnetGroup Limited

2Q19: look forward to inorganic growth

■ 2Q19 in line; core earnings decline reflects weakness in Singapore hiring.

■ Its 25% stake purchase of Staffline should boost earnings from 3Q19F, potentially adding S$2.5m-8.9m associates’ income over FY19-21F.

■ Rising contribution from overseas markets could be another growth driver. HRNET offers c.4% yield and currently trades at 7.3x ex-cash FY20F P/E.

2Q/1H19 core earnings met our/consensus expectations HRNET’s 2Q19 core PATMI of S$12.0m was within our/consensus expectations, which

fell 7.7% yoy on the back of stable topline, lower gross profit margin and government

subsidies. 2Q19 GPM was lower at 35.1% vs. 2Q18’s 36.9% (1Q19: 34.1%) as a result of

higher contribution from flexible staffing and government contracts which carry lower

margins. 1H19 core net profit (excluding fair value changes) accounted for 50%/49% of

our/consensus full-year forecasts, while 2H tends to be seasonally stronger.

Singapore weakness mitigated by North Asia growth Singapore continues to face macro headwinds in professional recruitment and flexible

staffing as gross profit fell S$2.2m this quarter. North Asia, which forms 45% of overall

gross profit (2Q18: 40%), saw an increase of S$1.2m in 2Q19, thanks to S$1.9m

contribution from acquisitions. Management remains positive on China (its 2nd

biggest

market) but is watchful of current developments in Hong Kong. Overall, 1H19 average

number of contractor employees rose marginally by 0.8% yoy to 11,949, while total

placements were down 4.2% yoy to 4,256.

25% stake in Staffline to boost earnings from 3Q19F HRNET announced in Jul 19 its acquisition of a 25% stake in UK-listed Staffline Group

(STAF LN, Not Rated) for S$46.3m, which implied acquisition P/E of c.3.8x based on

historical core earnings. Staffline helps to recruit more than 60,000 staff (mainly blue-

collar flexible staffing) daily for about 1,500 private sector clients in the UK and Ireland,

as well as provides adult skills and training. Management sees this as a synergistic

opportunity to enlarge its presence (potentially securing bigger global mandates), and we

expect this to add S$2.5m-8.9m associates’ income over FY19-21F. Staffline has

recorded adjusted earnings of £19.3m (S$32.4m) p.a. on average over the past three

years.

Reiterate Add We raise our FY19-21F EPS by 0.5-5.4% to factor in slower organic growth assumptions

and associates’ contribution from its recent 25% stake acquisition of UK-listed Staffline.

No changes to our Add call and S$1.01 TP, now pegged to 17x CY20F P/E (prev.18x),

slightly above industry average of 16.1x. We continue to like the stock for acquisition-led

growth for FY19-21F, strong net cash position (c.S$228m post Staffline investment) and

c.4% dividend yield. Downside risks: global economic slowdown and poor overseas

execution.


Singapore

ADD (no change)





Up/downside: 49.4%


Reuters: HRNE.SI

Bloomberg: HRNET SP


S$680.1m


S$0.15m




FY19F EPS increased by 0.5%.



Source: Bloomberg


Absolute (%) -2.9 -12.9 -22.4

Relative (%) 1.6 -9.9 -18.1


SIMCO Ltd 74.7 HSBC Holdings PLC 2.0

Vanda 1 Investments Pte Ltd 2.0

Insert

Analyst(s)

NGOH Yi Sin



Revenue (S$m) 391.9 428.5 429.9 439.0 448.3

Operating EBITDA (S$m) 56.17 62.73 65.81 71.46 74.80

Net Profit (S$m) 43.93 53.66 51.96 59.99 61.96

Normalised EPS (S$) 0.046 0.048 0.052 0.060 0.062

Normalised EPS Growth (13.2%) 2.8% 8.2% 15.5% 3.3%


DPS (S$) 0.023 0.028 0.026 0.030 0.031

Dividend Yield 3.41% 4.15% 3.83% 4.42% 4.56%

EV/EBITDA (x) 5.59 6.29 5.54 4.71 3.99

P/FCFE (x) 19.72 28.03 11.87 13.83 11.11

Net Gearing (91.9%) (86.4%) (89.3%) (89.7%) (92.6%)

P/BV (x) 2.18 2.04 1.92 1.77 1.65

ROE 20.9% 14.9% 15.1% 16.3% 15.6%

% Change In Normalised EPS Estimates 0.49% 5.42% 3.46%


69.0

80.4

91.9

103.3

0.600

0.700

0.800

0.900


1

2

3


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Company Note Agribusiness │ Singapore │ August 13, 2019



Insert Insert

Wilmar International

Eyeing listing of China business in 2H?

■ Wilmar’s 1H19 results were broadly in line with expectations.

■ 1H19 core net profit fell 20% yoy, due mainly to weaker crush margin.

■ Wilmar projects better 2H19 crush margin. Maintain Add with a higher TP of S$4.58 per share (based on SOP). Key catalyst is listing of China assets.

1H19 results broadly in line with expectations Wilmar posted a 50% yoy and 29% qoq drop in its 2Q19 core net profit (excluding non-

operating items) to US$177m due to weaker performances from its oilseeds and grains

as well as sugar divisions. As a result, core net profit fell 20% in 1H19. The half time

results were broadly in line, making up 35% of our and 34% of consensus full-year

projections. Over the past five years (excluding 2016), 1H core net profit has on average

made up 35% of its full-year core net profit. In line with the weaker results, the group

proposed a lower interim dividend of S$0.03 per share in 1H19 (vs. S$0.035 in 1H18).

Key surprises in 2Q vs. our expectations We were slightly surprised that the oilseeds and grains segment profit of US$59m in

2Q19 was weaker than 1Q19’s US$91m, due mainly to lower crush volumes and margins

as the business continued to be affected by the African swine fever outbreak. However,

we were positive on the better results from the tropical oils division (+15% yoy) in 2Q19

as better downstream margins trumped lower CPO prices and FFB output (-10% yoy).

The sugar division posted losses of US$69.4m in 2Q19 and US$67.7m in 1H19 due to

the consolidation of Shree Renuka Sugar Ltd. This more than offset the better

performances from its Australia and Indonesian operations.

Agribusiness processing more resilient against slowing economy Wilmar revealed that it will likely take several years to eradicate the African swine fever

that has impacted China’s soybean meal demand. However, the lower China hog

production will be offset partially by strong growth in the poultry sector. The group added

that the slowing economy, due partly to the US-China trade conflict, has not impacted

Chinese domestic consumption of food. The group is seeing stronger demand for better

quality food products in China and as such, is not overly concerned about the current

external environment.

Maintain Add with a higher SOP-based TP of S$4.58 Wilmar expects the margins of its crushing business and other segments to perform

better in 2H19, which is in line with our expectation. We cut our FY19-21F earnings

forecasts by 1-4% and raise our SOP-based target price to S$4.58 per share. We raise

our valuations for its oilseeds and grains as well as palm and lauric business to 1.2x

P/BV, as we expect the listing will unlock value for the oilseeds and grains business. We

continue to like Wilmar for its attractive valuations and proposed plan to list its China

operations. The stock currently trades at a forward P/E of 16x and P/BV of 1.1x. Key risks

to our view are lower-than-expected crush margin and sales volumes.


Singapore

ADD (no change)





Up/downside: 13.0%


Reuters: WLIL.SI

Bloomberg: WIL SP


S$25,649m


S$20.71m




We cut our FY19-21 net profit forecasts by

1-4% to reflect our recent downgrade in CPO price to RM2,100 per tonne for 2019 and RM2,300 per tonne for 2020-2021

Source: Bloomberg


Absolute (%) 7.7 14.7 29.4

Relative (%) 12.9 16.2 31.3

Major shareholders % held PPB Group & Kuok group 33.4 Archer Daniels Midland 23.9 Kuok Khoon Hong 12.5

Insert

Analyst(s)




Revenue (US$m) 43,574 44,498 44,393 49,703 52,883

Operating EBITDA (US$m) 2,361 2,446 2,545 2,584 2,827

Net Profit (US$m) 1,196 1,128 1,161 1,269 1,355

Core EPS (US$) 0.16 0.20 0.18 0.20 0.21

Core EPS Growth 4.8% 27.4% (11.0%) 9.3% 6.7%

FD Core P/E (x) 18.23 14.31 16.08 14.71 13.78

DPS (US$) 0.074 0.076 0.073 0.079 0.085

Dividend Yield 2.53% 2.60% 2.49% 2.72% 2.90%

EV/EBITDA (x) 13.85 14.44 12.73 13.43 12.16

P/FCFE (x) NA NA 5.79 NA NA

Net Gearing 97% 117% 96% 105% 99%

P/BV (x) 1.17 1.16 1.11 1.07 1.02

ROE 6.74% 8.15% 7.08% 7.41% 7.56%



97.0

109.5

122.0

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Company Note Airports │ Thailand │ August 13, 2019



HIGH

CONVICTION

Insert Insert

Airports of Thailand

A soft quarter, reflecting weakened economy

■ 3QFY9/19 net profit missed expectations by 10% due to one-off state property charge and soft aeronautic revenue.

■ As 9MFY19 EPS was at 75% of our previous full-year forecast, below expectation as 4Q is typically weak, we trim FY19-23F EPS by 0.1-1.1%.

■ Maintain Add. Renewal of DMK concession and 29% EPS growth in FY21F are potential re-rating catalysts.

Net profit miss from one-time SPC and soft aeronautic revenue AOT reported 3QFY19 net profit of THB5.9bn (-8.6% yoy, -23% qoq), missing both our

and Bloomberg consensus expectations by 10%. The main culprits for the miss were the

additional one-off state property charge (SPC) totalling THB322m, and weaker-than-

expected aeronautic revenues. The yoy decline was also due to the tax rebate of

c.THB280m in 3QFY18. Adjusting for one-offs, AOT’s 3QFY19 core net profit was

THB6.2bn, up 1.3% yoy, in line with the soft growth in international pax yoy.

Weakened domestic tourism demand resulted in soft topline growth 3QFY19 topline was at the low end of our forecast, with aeronautic revenues weaker than

expected -- aircraft landing and parking charges (LPC) shrunk 2.4% yoy. In our view, the

poor LPC was likely a consequence of weak domestic travel demand and 7% yoy decline

in domestic aircraft movement in response to the 2.7% yoy dip in domestic pax over Jan-

Jun. Passenger service charge (PSC) rose incrementally, in line with our expectation, as

total pax declined 1.01% yoy (international pax +1.64% yoy; domestic pax -4.6% yoy).

There were no surprises in non-aeronautics revenues and key operating cost items.

One-off from retrospective payment of state property charge On 25 Jul, AOT submitted a letter to the Stock Exchange of Thailand (SET), noting that

the Treasury Department and AOT have mutually agreed on new terms for the land lease

of Don Mueng (DMK) and four regional airports (HKT, CNX, HDY and CEI) for the period

of 2017-2032. The new SPC terms effectively translate to a 0.5%-pt hike in revenue

share from 5% to 5.5% for DMK and the four regional airports, or c.THB160m-200m p.a.

payable to the Treasury Department. Since the new terms were effective from 2017, AOT

was met with retrospective additional payment of THB322m, booked in 3QFY19F.

EPS tweak on weak domestic pax and change in land lease term We cut our FY19-23F EPS forecasts by 0.1-1.1% to reflect a more bearish view on

domestic tourism, as AOT registered a 3% decline in domestic pax in its Jan-Jun quarter.

We also lower our SPC forecast by c.6% in response to the change in SPC terms for

DMK and the regional airports that are more favourable than our previous expectations,

based on similar SPC terms for Suvarnabhumi Airport (BKK).

Renewal of DMK concession and EPS hike in FY21F as catalysts We maintain our Add call on AOT with DCF-based TP of THB82, with the renewal of

DMK airport concession and 29% EPS growth in FY21F as potential re-rating catalysts.

Slowing near-term passenger growth is a key risk to our call.


Thailand

ADD (no change)


Current price: THB69.75

Target price: THB82.00

Previous target: THB82.00

Up/downside: 17.6%


Reuters: AOT.BK

Bloomberg: AOT TB


THB996,428m


THB2,207m




FY19F EPS decreased by 1.06%



Source: Bloomberg


Absolute (%) -5.1 3 6.5

Relative (%) -2.1 1.6 9.6

Major shareholders % held Ministry of Finance 70.0 Thai NVDR 4.3 South East Asia (TYPE C) nominees

limited 2.8

Insert

Analyst(s)

Sukrit FRIESTAD


Financial Summary Sep-17A Sep-18A Sep-19F Sep-20F Sep-21F

Revenue (THBm) 54,901 60,537 63,735 68,289 83,421

Operating EBITDA (THBm) 31,521 36,427 38,453 41,827 53,936

Net Profit (THBm) 20,684 25,170 25,948 27,441 35,292

Core EPS (THB) 1.44 1.76 1.82 1.92 2.47

Core EPS Growth 7.0% 22.3% 3.0% 5.8% 28.6%

FD Core P/E (x) 48.37 39.56 38.40 36.31 28.23

DPS (THB) 0.86 1.05 1.00 1.10 1.40

Dividend Yield 1.23% 1.51% 1.43% 1.58% 2.01%

EV/EBITDA (x) 30.23 25.86 25.01 23.19 17.96

P/FCFE (x) 110.4 58.1 17.5 168.1 57.3

Net Gearing (33.2%) (38.0%) (22.7%) (15.9%) (15.1%)

P/BV (x) 7.58 6.92 6.45 5.95 5.32

ROE 16.4% 18.3% 17.4% 17.0% 19.9%



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106.9

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74.0

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Company Note Hotels │ Thailand │ August 13, 2019



Insert Insert

Central Plaza Hotel Dragged by weak hotel business

■ Centel’s 2Q19 core net profit was 7% below our forecast and 9% below consensus due to weaker than expected hotel business.

■ Its hotel’s RevPAR dropped 6.4% yoy, while its food SSSG declined 1.8% yoy in 2Q19.

■ We maintain our Hold call with a lower THB34.50 target price (21x FY20F P/E, -2 s.d. from 5-year mean).

Weaker-than-expected hotel business Centel reported THB281m core net profit in 2Q19, -24% yoy and -61% qoq. It was 7%

below our forecast and 9% below consensus. Its 1H19 core net profit formed 49% of our

full-year forecast. As such, we maintain our FY19F number. The disappointment came

mainly from the hotel business, even though the food business is still weak. Centel

booked a one-time THB58m provision for employee benefits in 2Q19.

Sharp drop in occupancy rate outweighed small ADR increase Its hotel revenues dropped 7% yoy in 2Q19 due to the sharp drop in occupancy rates in

Thailand from 79.5% in 2Q18 to 72.4% in 2Q19. Meanwhile, occupancy for its hotels in

the Maldives rose slightly from 79.4% in 2Q18 to 81.0% in 2Q19. As such, occupancy for

its whole portfolio dropped from 79.5% in 2Q18 to 72.9% in 2Q19. Furthermore, with a

2% pts increase in average daily room rate (ADR), its revenue per available room

(RevPAR) dropped 6.4% yoy in 2Q19, which was weaker than -5.7% in 1Q19. We expect

its RevPAR to be flat in 2H19, resulting in a -3% RevPAR decline in FY19F. And with

greater hotel room supply in Thailand, we expect its RevPAR to decline 2% yoy in

FY20F. Hotel’s gross margin was weak at 28.3% in 2Q19 vs. 30.1% in 2Q18.

Food’s SSSG dropped 1.8% yoy in 2Q19 Its food’s same-store-sale growth (SSSG) dropped 1.8% yoy in 2Q19, which improved

from -3.8% yoy in 1Q19. As such, its SSSG declined 2.8% yoy in 1H19 and we expect it

to be -2.5% yoy in FY19F and -1.0% yoy in FY20F. Its food gross margin declined from

46.4% in 2Q18 to 45.5% in 2Q19, but improved from 45.3% in 1Q19. We expect it to be

45.7% in FY19F and 45.9% in FY20F. Excluding one-time provision for employee benefit,

its SG&A as a percentage of revenues would be 33.3% in 2Q19 vs. 32.5% in 2Q18,

which is still under control, in our view.

Maintain Hold with a lower THB34.50 target price Even though Centel has underperformed for some time, we do not see any positive

catalyst in the near future as its earnings are still clouded by weak tourist arrival outlook,

increase in hotel room supply and weak food business. We therefore maintain our Hold

rating with a lower THB34.50 target price, now based on 21x FY20F P/E, which is -2 s.d.

from its 5-year mean from THB38 previously (23x FY20F P/E, -1.5 s.d.). Upside risk to

our call is a jump in tourist arrivals in Thailand.


Thailand

HOLD (no change)





Up/downside: 7.0%


Reuters: CENT.BK

Bloomberg: CENTEL TB


THB43,538m


THB204.1m




No change.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -8.5 -20.4 -26.7

Relative (%) -5.5 -21.8 -23.6

Major shareholders % held Chirathivat family 65.0

Insert

Analyst(s)

Kasem PRUNRATANAMALA, CFA



Revenue (THBm) 19,929 21,378 21,322 22,300 23,919


Net Profit (THBm) 1,991 2,178 2,039 2,232 2,464

Core EPS (THB) 1.48 1.61 1.51 1.65 1.83

Core EPS Growth 7.7% 9.4% (6.4%) 9.5% 10.4%

FD Core P/E (x) 21.86 19.99 21.36 19.51 17.67

DPS (THB) 0.60 0.65 0.65 0.60 0.66

Dividend Yield 1.86% 2.02% 2.00% 1.87% 2.05%

EV/EBITDA (x) 10.68 9.86 10.10 9.75 8.76

P/FCFE (x) 93.35 19.28 NA 49.33 48.18

Net Gearing 52.6% 37.7% 48.7% 63.6% 53.6%

P/BV (x) 3.77 3.37 3.09 2.81 2.55

ROE 18.1% 17.8% 15.1% 15.1% 15.1%



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97.0

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Company Note Technology Components │ Thailand │ August 13, 2019



Insert Insert

KCE Electronics

Macro slowdown extinguishes rebound hope

■ KCE’s 2Q19F core net profit declined 81% yoy to THB200m, missing our and Bloomberg consensus estimates by 29% and 17% respectively.

■ We expect sales to continue sliding in 2H19F as car production slows amid increasing regulatory risks and worsening macroeconomic conditions.

■ We cut our FY19-21F core EPS by 4-23% to reflect lower sales and GPM assumptions. Maintain Reduce with a lower TP of THB11.7.

Even more disappointing than expected KCE posted 2Q19 net profit of THB159m (-72% yoy, -41% qoq). Excluding an exchange

gain of THB3.1m and a one-off provision for employee benefits of THB54.7m, 2Q19 core

net profit was THB200m (-81% yoy, -60% qoq), missing our and Bloomberg consensus

estimates by 29% and 17% respectively. We attribute the shortfall to lower-than-expected

sales revenue and GPM. 1H19 core net profit was at 39% of our previous FY19 forecast.

Sales volume fell across all segments and regions in 2Q19 2Q19 revenue shrunk 18% yoy, larger than our forecast of 11%. The decline was

consistent across its product mix, with the shipment volumes for 6-or-higher layers, 4

layers, and double-sided printed circuit boards (PCBs) down 22%, 16% and 10% yoy,

respectively. The decline was also consistent across geographical locations, with sales

volume to Europe, America and China falling 18%, 15% and 10% yoy, respectively.

GPM hurt by low production utilisation We estimate that COGS accounts for half of KCE's overhead. As such, KCE’s gross

margins is highly sensitive to its production volume. As its production fell 15% yoy in

2Q19, KCE’s GPM declined to 19.0%, lower than our previous expectation of 22.2%.

Driving down the drain We maintain our view that the automotive industry would continue to struggle amid weak

macros and emission overhang. In Jul 2019, global car sales volume declined 1.5% yoy, driven by a 4% yoy decline in China. We expect the implementation of a new emission

policy in China, coupled with dampened consumer confidence, to cause consumers to

hold back on auto purchases in the region in the near term. Note that on 22 Jul,

Continental (CON GR, Not Rated) revised down its 2019 sales guidance by 2-4%, citing

further decline in vehicle output. As Continental remains one of KCE’s biggest customers,

we believe KCE’s sales growth will likely remain under pressure as well in FY19F.

Cutting FY19-21F core EPS by 4-23%, TP falls to THB11.70 We cut our FY19-21F EPS mainly to reflect lower sales and GPM assumptions following

its weaker-than-expected 2Q19 results. Our TP dips to THB11.70, still based on 12.6x

CY20F P/E (-1 s.d. below its 5-year historical mean of 20.0x). We keep our Reduce rating

as the stock looks overvalued to us given its declining profitability. Upside risks to our call

are weaker-than-expected THB/US$ and stronger-than-expected auto recovery.


Thailand

REDUCE (no change)





Up/downside: -23.5%


Reuters: KCE.BK

Bloomberg: KCE TB


THB17,944m


THB210.8m




FY19F core EPS decreased by 23%



Source: Bloomberg


Absolute (%) -20.3 -30.5 -65.8

Relative (%) -16.7 -32.3 -63.6

Major shareholders % held Ongkosit Family 33.8 HSBC (Singapore) Nominees PTE Ltd. 6.5

Mr. Panja Senadisai 4.7

Insert

Analyst(s)

Kitichan SIRISUKARCHA, CFP



Revenue (THBm) 14,195 13,982 12,181 13,262 14,432

Net Profit (THBm) 2,545 2,015 910 1,088 1,346

Core EPS (THB) 2.03 1.55 0.80 0.93 1.15

Core EPS Growth (19.7%) (23.9%) (48.4%) 16.3% 23.7%

FD Core P/E (x) 7.49 9.89 19.17 16.48 13.32

Price To Sales (x) 1.26 1.28 1.47 1.35 1.24

DPS (THB) 1.10 1.10 1.10 1.10 1.15

Dividend Yield 7.19% 7.19% 7.19% 7.19% 7.52%

EV/EBITDA (x) 5.53 6.20 9.41 9.12 7.76

P/FCFE (x) 11.46 11.64 9.46 NA 8.19

Net Gearing 21.1% 13.8% 10.5% 29.2% 25.4%

P/BV (x) 1.60 1.50 1.54 1.57 1.57

ROE 22.5% 15.6% 7.9% 9.4% 11.8%



30

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Company Note Hotels │ Thailand │ August 13, 2019



Insert Insert

Minor International Dragged by weak hotel margins

■ MINT’s 2Q19 core net profit was 9% below our forecast and 16% below consensus due to weaker than expected hotel margins.

■ Food business’s SSSG improved marginally qoq in 2Q19.

■ Maintain Add with a THB44 target price (31x FY20F P/E, its 5-year mean).

Weaker hotel margins offset strong revenue growth MINT reported THB1.9bn core net profit in 2Q19, +25% yoy and +483% qoq. It was 9%

below our forecast and 16% below consensus. The main culprit was weaker than

expected gross hotel margin. Its 1H19 core net profit formed 36% of our FY19F.

However, since 2H is likely to be stronger than 1H, we maintain our full-year forecast.

Note that MINT booked a few non-recurring items in 2Q19 – THB38m provision for long-

term employee benefit after tax, THB44m after-tax gain from NH Hotel’s (NHH) asset

rotation and THB320m after-tax FX loss from cross currency swap.

Weaker than expected hotel’s gross margin MINT’s hotel gross margin stood at 40.0% in 2Q19 vs. 34.2% in 1Q19 and 42.4% in

2Q18. Note that MINT started consolidating NHH in 4Q18. And we had expected MINT’s

consolidated gross margin to be higher since NHH’s gross margin rose from 41.0% in

2Q18 and 29.8% in 1Q19 to 42.1% in 2Q19. We expect its gross margin to be 45.4% in

FY19F and 46.3% in FY20F vs. 48.6% in FY18. Its revenue per available room (RevPAR)

for its owned hotels grew 6.2% yoy in 2Q19 with a 3.7% yoy increase for its hotels in

Thailand, which is not bad, given only 1% yoy increase in tourist arrivals in 2Q19.

Food’s SSSG improved from -4.0% in 1Q19 to -3.6% in 2Q19 Its food business recorded -3.6% yoy same-store-sale growth (SSSG) in 2Q19 vs. -4.0%

yoy in 1Q19. Its Thailand hub’s SSSG improved from -6.0% in 1Q19 to -5.6% in 2Q19. Its

China hub’s SSSG slid from +2.5% yoy in 1Q19 to +1.1% yoy in 2Q19, while its

Australian hub showed -2.3% yoy SSSG in 2Q19 vs. -2.1% yoy in 1Q19. We expect its

SSSG to be -3% yoy in FY19F and -1% yoy in FY20F. Meanwhile, its total system sales

grew 3.8% yoy in 2Q19 vs. 5.3% yoy in 1Q19. Its food gross margin rose from 71.0% in

2Q18 and 70.6% in 1Q19 to 71.6% in 2Q19. We expect its food gross margin to hover

around 70% during FY19-20F.

SG&A under control Its SG&A as % of revenues dropped to 29.1% in 2Q19 vs. 40.3% in 2Q18 and 31.6% in

1Q19 on the back of larger revenue base.

Maintain Add with an unchanged THB44 target price We maintain our Add call on MINT with a THB44 target price, still based on 31x FY20F

P/E, which is its 5-year historical mean. Catalyst is NHH’s stronger earnings momentum.

Downside risk to our call is a sharp slowdown in European economies, which would

negatively affect NHH’s performance.


Thailand

ADD (no change)





Up/downside: 16.6%


Reuters: MINT.BK

Bloomberg: MINT TB


THB174,364m


THB534.2m




No change.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -7.9 4.1 -2

Relative (%) -4.9 2.7 1.1

Major shareholders % held Heinecke family 34.0 Mr Nithi Osathanugrah 8.6

Insert

Analyst(s)

Kasem PRUNRATANAMALA, CFA



Revenue (THBm) 58,142 79,183 121,154 124,506 129,165


Net Profit (THBm) 5,415 5,234 5,990 6,563 6,713

Core EPS (THB) 1.20 1.11 1.30 1.42 1.45

Core EPS Growth 13.5% (7.3%) 16.6% 9.6% 2.3%

FD Core P/E (x) 31.47 33.31 29.11 26.57 25.97

DPS (THB) 0.39 0.40 0.66 0.54 0.56

Dividend Yield 1.02% 1.06% 1.75% 1.44% 1.47%

EV/EBITDA (x) 17.06 19.24 13.17 11.80 10.79

P/FCFE (x) NA 214.2 NA 62.9 59.4

Net Gearing 86% 137% 106% 93% 86%

P/BV (x) 3.68 2.42 2.23 2.10 1.97

ROE 12.8% 8.8% 8.0% 8.1% 7.8%



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Company Note Oil & Gas - Integrated │ Thailand │ August 13, 2019 Shariah Compliant



DOWNGRADE

Insert Insert

PTT

Gas EBITDA has peaked in 2Q19

■ 2Q19 core net profit was in-line with consensus and our estimates

■ PTT’s natural gas EBITDA is likely to be under pressure in 2H19F.

■ We downgrade PTT to Hold from Add with a lower SOP TP of THB47.5.

2Q19 core net profit driven by stronger gas business PTT reported 2Q19 net profit at THB25.9bn, down 11.5% qoq, mainly due to weak

contribution from refinery and chemical subsidiaries and stock loss for the oil & retail

business of THB2.8bn. Excluding non-operating and forex items, core net profit was

THB26.1bn, up 7.5% qoq on stronger contribution from PTTEP and PTT’s core natural

gas business. 1H19 formed 52%/46% of our/consensus full-year estimates.

Higher gas price drove 2Q19 gas EBITDA Gas EBITDA in 2Q19 was THB19.8bn, up 10.6% qoq, thanks mainly to higher industrial

gas selling price which was linked to fuel oil price and lower EBITDA loss from natural

gas vehicle (NGV) sales (selling price for public users increased by THB1.0/kg since May

19). Total gas sales volume improved to 5,019mmscfd, up 5.7% on higher sales volume

from its gas separation business (GSP) and independent power producers (IPP) during

the summer. Higher gulf gas cost (US$314/t in 2Q19 vs. US$309/t in 1Q19) was partly

offset by lower pooled gas price at US$7.2/mmbtu in 2Q19 vs. US$7.3/mmbtu in 1Q19.

PTT reported negative EBITDA for its international trading business, partly due to lower

condensate price sold to its subsidiaries and derivative loss. Core EBITDA from the oil &

retail business improved by 8.6% qoq, thanks to higher petroleum sales volume and

stronger contribution from the coffee business.

Natural gas EBITDA expected to be weaker in 2H19 We see no catalysts for PTT’s core natural gas business due to lower selling prices and

industrial gas sales in 2H19. Fuel oil price started correcting to US$54.9/bbl in Aug 19

from US$67.0/bbl in Jul 19. As such, we expect to see lower supply & marketing (S&M)

EBITDA in 2H19. For the GSP business, ethane selling price is linked to high-density

polyethylene (HDPE) price which is likely to remain under pressure in 2H19 due to

demand risk and supply gluts from the US and China, leading to lower GSP EBITDA.

Downgrade to Hold on near-term gas earnings pressure We cut PTT’s FY19-21F EPS forecasts by 11.7-17.9% due to lower EBITDA contributed

from the core natural gas business and weaker refinery and chemicals EBITDA from

PTT’s subsidiaries. Accordingly, we cut our SOP-based target price to THB47.5 from

THB55.5. PTT currently trades at 2019F P/BV of 1.35x, lower than its 10-year average of

1.58x. However, its 2019F ROE should fall to 11.7% from 14.7% in 2018. We downgrade

PTT to Hold from Add as we believe the near-term earnings outlook could be weak.

Upside risk is stronger-than-expected fuel oil price, while downside risk is lower-than-

expected domestic gas demand.


Thailand

HOLD (previously ADD)





Up/downside: 7.3%


Reuters: PTT.BK

Bloomberg: PTT TB


THB1,263,913m


THB2,176m







Source: Bloomberg


Absolute (%) -7.3 -6.9 -15.7

Relative (%) -4.3 -8.3 -12.6


Ministry of Finance 51.1 Vayupak Funds 12.4

Social Security Office 1.2

Insert

Analyst(s)

Amornrat CHEEVAVICHAWALKUL



Revenue (THBm) 1,995,722 2,336,155 2,191,055 2,239,231 2,264,145


Net Profit (THBm) 135,180 119,684 106,705 123,352 122,805

Core EPS (THB) 4.73 4.19 3.74 4.32 4.30

Core EPS Growth 44.2% (11.5%) (10.8%) 15.6% (0.4%)

FD Core P/E (x) 9.35 10.56 11.84 10.25 10.29

DPS (THB) 2.00 1.68 1.49 1.73 1.72

Dividend Yield 4.52% 3.79% 3.38% 3.90% 3.89%

EV/EBITDA (x) 5.72 5.17 5.60 4.68 4.53

P/FCFE (x) 20.33 5.10 19.12 7.96 9.61

Net Gearing 10.7% 8.3% 6.0% (3.3%) (9.8%)

P/BV (x) 1.54 1.44 1.35 1.25 1.16

ROE 17.1% 14.1% 11.8% 12.6% 11.7%



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93.4

99.9

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Company Note Banks │ Thailand │ August 13, 2019



Insert Insert

Thanachart Capital

The 10bn baht question

■ Post-EBT, TCAP will be transformed into a holding company. However, based on our estimates, the positives from the merger has been priced in.

■ Deployment of THB10bn proceeds from the TBANK divestment remains a key catalyst for TCAP, but lack of visibility causes us to leave it as an upside.

TCAP’s utilisation of TBANK divestment cash proceeds will be key When the entire business transfer (EBT) of TCAP’s 51% subsidiary TBANK to TMB is

completed in Dec 19, we expect TCAP’s to be fully transformed into a holding company,

with THB10bn in cash proceeds. TCAP’s utilisation of such proceeds is therefore key to

its outlook. Of the four possibilities TCAP has highlighted for fund utilisation, we believe

investing the THB10bn plus THB11bn cash on hand in a new finance-related business

will likely be optimal for TCAP’s shareholders. We believe that an extra dividend payment

of up to THB8.5/share or potential treasury stock plan will only generate short-term

interest. We have included new investments with a 5% return p.a. into our forecasts.

A well thought out transformation into holding company According to TMB’s rights offering terms release on 8 Aug, TCAP will become a major

shareholder of TMB, with a 20.8% stake post rights offering and private placement. As a

result of the EBT, TCAP will receive c.THB80bn in cash proceeds, given its 51% stake in

the subsidiary. TCAP will have to spend c.THB44bn to subscribe for TMB’s private

placement and acquire the 20.8% stake in the merged bank, and c.THB14 of its proceeds

to repurchase eight of TBANK’s subsidiaries, as a part of its business realignment efforts

prior to the EBT of TBANK to TMB. Following the completion of the sale of TBANK,

TCAP will also seek to acquire BNS’s stake in six of the eight subsidiaries for another

THB12bn, leaving behind c.THB10bn in cash proceeds from the transaction.

New valuation method agrees with market pricing of TCAP shares As TCAP is transformed into a holding company, our previous valuation based on

Gordon growth model and targeted P/BV has become unsuitable. As such, we adopt both

a dividend discount model (DDM) and sum of the parts (SOP) valuation of its investment

holdings to derive TCAP’s new target price of THB56.6, using the mid-point between the

two methods. We expect a 9-18% EPS growth in FY20-21F, reflecting our expectation for

the combined bank, Bloomberg consensus expectations for non-coverage listed

companies under TCAP, and earnings growth of 5% p.a. for the unlisted subsidiaries.

The transformation into holding company, limits valuation upside In our view, TCAP is set to benefit more from the EBT of TBANK than TMB. However, we

believe the benefits from merger with TMB are already reflected in TCAP’s current share

price. We expect the market to adopt a SOP valuation method, taking into account the

holding company discount of 20%, and yielding our new target price of THB56.6. In our

view, upside risks to our call post-EBT could stem from superior utilisation of its cash

proceeds, with the possibility of an extraordinary dividend and potential share repurchase

programme likely limiting TCAP’s valuation downside. Downside risks are likely to stem

from near-term concerns over TBANK provisioning needs for TFRS9.


Thailand

HOLD (no change)





Up/downside: 2.0%


Reuters: TCAP.BK

Bloomberg: TCAP TB


THB63,584m


THB183.5m




No change

Source: Bloomberg


Absolute (%) -0.9 3.7 4.2

Relative (%) 2.1 2.3 7.3

Major shareholders % held MBK plc 10.2

Insert

Analyst(s)

Sukrit FRIESTAD



Net Interest Income (THBm) 29,170 30,767 30,911 32,324 33,970

Total Non-Interest Income (THBm) 13,402 13,408 14,135 14,815 15,667

Operating Revenue (THBm) 42,572 44,175 45,046 47,139 49,637

Total Provision Charges (THBm) -6,236 -4,785 -5,252 -5,605 -6,075

Net Profit (THBm) 7,001 7,839 7,424 7,874 8,431

Core EPS (THB) 5.80 6.61 6.37 6.76 7.24

Core EPS Growth 16.4% 13.9% (3.6%) 6.1% 7.1%

FD Core P/E (x) 9.56 8.39 8.71 8.21 7.67

DPS (THB) 2.20 2.60 2.60 2.70 2.90

Dividend Yield 3.96% 4.68% 4.68% 4.86% 5.23%

BVPS (THB) 51.41 56.42 60.98 65.82 71.00

P/BV (x) 1.08 0.98 0.91 0.84 0.78

ROE 11.8% 12.3% 10.9% 10.7% 10.6%



94.0

101.1

108.3

48.0

53.0

58.0


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Asia Pacific Daily | Equity Research | August 14, 2019

7

REGIONAL HEAD

Bertram LAI Regional Head of Research +852 2532 1111

[email protected]

COUNTRY HEADS OF RESEARCH

Ivy NG, CFA Siew Khee, LIM Erwan TEGUH Kasem PRUNRATANAMALA, CFA Raymond CHENG Malaysia Singapore Indonesia Thailand Hong Kong/China +60 (3) 2261-9073 +65 6210-8664 +62 (21) 3006-1720 +66 (2) 657-9221 +852 2539-1324 [email protected] [email protected] [email protected] [email protected] [email protected] KJ Hwang Pramod AMTHE South Korea India +82 (2) 6730-6123 +91 (22) 4880-5167 [email protected] [email protected]

Yolan SEIMON Anirban LAHIRI

Sri Lanka Vietnam +94 (11) 230-6273 +8428 7300-0688 (ext: 21242) [email protected] [email protected] Coverage via partnership arrangement with John

Keells Stock Brokers

Coverage via partnership arrangement with

VNDirect Securities Corporation

REGIONAL SECTOR HEADS

KJ KWANG Ivy NG, CFA Raymond YAP, CFA Offshore & Marine Plantations Transportation +82 (2) 6730-6123 +60 (3) 2261-9073 +60 (3) 2261-9072 [email protected] [email protected] [email protected]

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DISCLAIMER The content of this report (including the views and opinions expressed therein, and the information comprised therein) has been prepared by and belongs to CGS-CIMB save that (i) if it is a report written by the analyst(s) of John Keells Stock Brokers (“John Keells”), it belongs to John Keells; (ii) if it is a report written by the analyst(s) of SB Equities Inc (“SBE”), it belongs to SBE; and (iii) if it is a report written by the analyst(s) of Morgans Financial Limited (“Morgans”), it belongs to Morgans. This report is distributed by CGS-CIMB, and in respect of sections of the report relating to (i), (ii) and/or (iii) aforesaid, it is distributed pursuant to an arrangement between CGS-CIMB and John Keells, SBE and Morgans respectively and none of the aforesaid parties is an affiliate of CGS-CIMB.

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Unless otherwise specified, this report is based upon reasonable sources. Such sources will, unless otherwise specified, for market data, be market data and prices available from the main stock exchange or market where the relevant security is listed, or, where appropriate, any other market. Information on the accounts and business of company(ies) will generally be based on published statements of the company(ies), information disseminated by regulatory information services, other publicly available information and information resulting from our research.

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CGS-CIMB, John Keells, SBE and/or Morgans and/or their respective affiliates and related corporations (including CGIFHL, CIMBG and their respective related corporations), their directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto and may from time to time add to or dispose of, or may be materially interested in, any such securities. Further, CGS-CIMB, John Keells, SBE and/or Morgans and/or their respective affiliates and related corporations (including CGIFHL, CIMBG and their respective related corporations) do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory, underwriting or placement services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report.

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affiliates, subsidiaries and related corporations. The term “Morgans Financial Limited” shall, unless the context otherwise requires, mean each of Morgans Financial Limited and its affiliates, subsidiaries and related corporations. The term “CGS-CIMB” shall denote, where appropriate, the relevant entity distributing or disseminating the report in the particular jurisdiction referenced below, or, in every other case except as otherwise stated herein, CGS-CIMB Securities International Pte. Ltd. and its affiliates, subsidiaries and related corporations.

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Information in this report is a summary derived from individual research reports. As such, readers are directed to the individual research report or note to review the individual Research Analyst’s full analysis of the subject company. Important disclosures relating to the companies that are the subject of research reports published by CGS-CIMB, John Keells, SBE or Morgans, as the case may be, and the proprietary position by each of them and shareholdings of its Research Analysts’ who prepared the report in the securities of the company(s) are available in the individual research report.

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This publication is strictly confidential and is for private circulation only to clients of CHK.

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The research analysts, strategists or economists principally responsible for the preparation of this research report are segregated from the other activities of CGS-CIMB India and they have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues, client feedback and competitive factors. Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed or proposed to be performed by CGS-CIMB India or its affiliates.

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CGS-CIMB India, its associates and the analyst engaged in preparation of this research report have not received any compensation for investment banking, merchant banking or brokerage services from the subject company mentioned in the research report in the past 12 months.

CGS-CIMB India, its associates and the analyst engaged in preparation of this research report have not managed or co-managed public offering of securities for the subject company mentioned in the research report in the past 12 months. The analyst from CGS-CIMB India engaged in preparation of this research report or his/her relative (a) do not have any financial interests in the subject company mentioned in this research report; (b) do not own 1% or more of the equity securities of the subject company mentioned in the research report as of the last day of the month preceding the publication of the research report; (c) do not have any material conflict of interest at the time of publication of the research report

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rely, use or disclose to anyone else this report or its contents.

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(d) MAS Notice on Recommendation on Investment Products [Notice No. FAA-N16];

(e) Section 36 (obligation on disclosure of interest in specified products), and

(f) any other laws, regulations, notices, directive, guidelines, circulars and practice notes which are relates to the above, to the extent permitted by applicable laws, as may be amended from time to time, and any other laws, regulations, notices, directive, guidelines, circulars, and practice notes as we may notify you from time to time. In addition, the recipient who is an accredited investor, expert investor or institut ional investor acknowledges that as CGS-CIMBR is exempt from Section 27 of the FAA, the recipient will also not be able to file a civil claim against CGS-CIMBR for any loss or damage arising from the recipient’s reliance on any recommendation made by CGS-CIMBR which would otherwise be a right that is available to the recipient under Section 27 of the FAA, the recipient will also not be able to file a civil claim against CGS-CIMBR for any loss or damage arising from the recipient’s reliance on any recommendation made by CGS-CIMBR which would otherwise be a right that is available to the recipient under Section 27 of the FAA.

CGS-CIMBR, its affiliates and related corporations, their directors, associates, connected parties and/or employees may own or have positions in specified products of the company(ies) covered in this research report or any specified products related thereto and may from time to time add to or dispose of, or may be materially interested in, any such specified products. Further, CGS-CIMBR, its affiliates and its related corporations do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in specified products of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory, underwriting or placement services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report..

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CGS-CIMB is not registered with the Spanish Comision Nacional del Mercado de Valores to provide investment services.

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Switzerland: This report has not been prepared in accordance with the recognized self-regulatory minimal standards for research reports of banks issued by the Swiss Bankers’ Association (Directives on the Independence of Financial Research).

Thailand: This report is issued by CGS-CIMB, John Keells, SBE or Morgans, as the case may be, and distributed by CGS-CIMB Securities (Thailand) Co., Ltd. (“CGS-CIMB Thailand”) based upon sources believed to be reliable (but their accuracy, completeness or correctness is not guaranteed). The statements or expressions of opinion herein were arrived at after due and careful consideration for use as information for investment. Such opinions are subject to change without notice and CGS-CIMB Thailand has no obligation to update the opinion or the information in this research report.

CGS-CIMB Thailand may act or acts as Market Maker, and issuer and offerer of Derivative Warrants and Structured Note which may have the following securities as its underlying securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before making investment decisions.

AAV, ADVANC, AEONTS, AMATA, ANAN, AOT, AP, BANPU, BBL, BCH, BCP, BCPG, BDMS, BEAUTY, BEC, BEM, BGRIM, BH, BJC, BLAND, BPP, BTS, CBG, CENTEL, CHG, CK, CKP, COM7, CPALL, CPF, CPN, DELTA, DTAC, EA, EGCO, EPG, ERW, ESSO, GFPT, GLOBAL, GPSC, GULF, GUNKUL, HANA, HMPRO, INTUCH, IRPC, IVL, JAS, JMT, KBANK, KCE, KKP, KTB, KTC, LH, MAJOR, MBK, MEGA, MINT, MTC, ORI, OSP, PLANB, PRM, PSH, PSL, PTG, PTT, PTTEP, PTTGC, QH, RATCH, ROBINS, RS, SAWAD, SCB, SCC, SGP, SIRI, SPALI, SPRC, STA, STEC, SUPER, TASCO, TCAP, THAI, THANI, TISCO, TKN, TMB, TOA, TOP, TPIPP, TRUE, TTW, TU, TVO, WHA.

Corporate Governance Report:

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.

The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CGS-CIMB Thailand does not confirm nor certify the accuracy of such survey result.

Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result

Description: Excellent Very Good Good N/A

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Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2018, Anti-Corruption 2018

ADVANC – Excellent, Certified, AEONTS – Good, n/a, AH – Very Good, n/a, AMATA – Excellent, Declared, ANAN – Excellent, Declared, AOT – Excellent, Declared, AP – Excellent, Certified, ASP – Very Good, Certified, BANPU – Excellent, Certified, BAY – Excellent, Certified, BBL – Very Good, Certified, BCH – Good, Certified, BCP - Excellent, Certified, BCPG – Excellent, Certified, BEM – Very Good, n/a, BDMS – Very Good, n/a, BEAUTY – Good, n/a, BEC – Very Good, n/a, , BGRIM – Very Good, Declared, BH - Good, n/a, BJC – Very Good, Declared, BJCHI – Very Good, Certified, BLA – Very Good, Certified, BPP – Very Good, Declared, BR - Good, Declared, BTS - Excellent, Certified, CBG – Very Good, n/a, CCET – Good, n/a, CENTEL – Very Good, Certified, CHG – Very Good, Declared, CK – Excellent, n/a, COL – Excellent, Declared, CPALL – Very Good, Certified, CPF – Excellent, Certified, CPN - Excellent, Certified, DELTA - Excellent, n/a, DEMCO – Excellent, Certified, DDD – Very Good, Declared, DIF – not available, n/a, DREIT – not available, n/a, DTAC – Excellent, Certified, EA – Excellent, n/a, ECL – Very Good, Certified, EGCO - Excellent, Certified, EPG – Very Good, n/a, ERW – Very Good, n/a, GFPT - Excellent, Certified, GGC – Excellent, Certified, GLOBAL – Very Good, n/a, GLOW – Very Good, Certified, GPSC – Excellent, Certified, GULF – Very Good, n/a, GUNKUL – Excellent, Certified, HANA - Excellent, Certified, HMPRO - Excellent, Certified, HREIT - Excellent, Certified ICHI – Excellent, Declared, HUMAN – not available, n/a, III – Good, n/a, INTUCH - Excellent, Certified, IRPC – Excellent, Certified, ITD* – Very Good, n/a, IVL - Excellent, Certified, JASIF – not available, n/a, JWD – Very Good, n/a, KBANK - Excellent, Certified, KCE - Excellent, Certified, KKP – Excellent, Certified, KSL – Excellent, Certified, KTB - Excellent, Certified, KTC – Excellent, Certified, LH - Very Good, n/a, LPN – Excellent, Certified, M – Very Good, Certified, MACO – Very Good, n/a, MAJOR – Very Good, n/a, MAKRO – Excellent, Declared, MALEE – Very Good, Certified, MC – Very Good, Certified, MCOT – Excellent, Certified, MEGA – Very Good, n/a, MINT - Excellent, Certified, MTC – Excellent, Declared, NETBAY – Good, n/a, OSP – not available, n/a,PLANB – Excellent, Declared, PLAT – Very Good, Certified, PR9 – not available, n/a, PSH – Excellent, Certified, PSTC – Good, Certified, PTT - Excellent, Certified, PTTEP - Excellent, Certified, PTTGC - Excellent, Certified, QH – Excellent, Certified, RATCH – Excellent, Certified, ROBINS – Excellent, Certified, RS – Very Good, n/a, RSP – not available, n/a, S – Very Good, n/a, SAMART - Excellent, n/a, SAPPE – Very Good, Declared, SAT – Excellent, Certified, SAWAD – Very Good, n/a, SC – Excellent, Declared, SCB - Excellent, Certified, SCC – Excellent, Certified, SCN – Very Good, Certified, SF – Good, n/a, SIRI – Very Good, Certified, SPA - Good, n/a, SPALI - Excellent, n/a, SPRC – Excellent, Certified, STA – Very Good, Certified, STEC – Excellent, n/a, SVI – Excellent, Certified, SYNEX – Very Good, Declared, TASCO – Excellent, Certified, TCAP – Excellent, Certified, THANI – Excellent, Certified, TIPCO – Very Good, Certified, TISCO - Excellent, Certified, TKN – Very Good, Declared, TMB - Excellent, Certified, TNR – Very Good, Declared, TOP - Excellent, Certified, TPCH – Good, n/a, TPIPP – Good, n/a, TRUE – Excellent, Certified, TU – Excellent, Certified, TVO – Very Good, Declared, UNIQ – Good, n/a, VGI – Excellent, Certified, WHA – Excellent, Certified, WHART – not available, n/a, WICE – Very Good, Certified, WORK –

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Good, n/a. Companies participating in Thailand’s Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of August 31, 2018) are categorized into:

- Companies that have declared their intention to join CAC, and

- Companies certified by CAC

* The company, its director or management had been reportedly accused for breaching proper corporate governance such as violation of the SEC’s regulations or charged with corruption.

Recommendation Framework

Stock Ratings Definition:

Add The stock’s total return is expected to exceed 10% over the next 12 months.

Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.

Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.

The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition:

Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.

Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.

Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition:

Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.

Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.

Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

WJV#05c

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